/raid1/www/Hosts/bankrupt/TCREUR_Public/240329.mbx
T R O U B L E D C O M P A N Y R E P O R T E R
E U R O P E
Friday, March 29, 2024, Vol. 25, No. 65
Headlines
B E L G I U M
TEAM.BLUE FINCO: Moody's Affirms B3 CFR, Cuts Sec. Term Loan to B3
F R A N C E
CASINO GROUP: Simpson Thacher Advises Quatrim Noteholders
FNAC DARTY: Fitch Rates EUR500MM Sr. Unsec Bond 'BB+(EXP)'
G E O R G I A
GEORGIA: Moody's Affirms 'Ba2' Issuer Ratings, Outlook Now Stable
I R E L A N D
NORDIC AVIATION: Moody's Affirms 'B2' CFR, Outlook Remains Stable
SHAMROCK RESIDENTIAL 2023-1: S&P Cuts Rating on G-Dfrd Notes to CCC
I T A L Y
BANCO BPM: Fitch Assigns 'BB' Rating to EUR500MM Subordinated Debt
EVOCA SPA: Moody's Affirms 'B3' CFR & Alters Outlook to Stable
L U X E M B O U R G
ARRIVAL: NYSE to Delist Securities on April 1
RADAR TOPCO: Fitch Assigns BB-(EXP) LongTerm IDR, Outlook Positive
M A L T A
ESPORTS ENTERTAINMENT: Financial Woes Raise Going Concern Doubt
N E T H E R L A N D S
CLEAR CHANNEL: Moody's Rates Sr. Secured 1st Lien Term Loans 'B3'
R O M A N I A
DIGI COMMUNICATIONS: S&P Alters Outlook to Neg., Affirms 'BB-' ICR
S P A I N
AUTOVIA DE LA MANCHA: Moody's Affirms 'Ba2' Sr. Secured Debt Rating
LORCA HOLDCO: Fitch Hikes LongTerm IDR to 'BB', Outlook Positive
T U R K E Y
TAV HAVALIMANLARI: Fitch Hikes LongTerm IDR to BB+, Outlook Stable
TURKIYE SINAI: Fitch Assigns Final 'CCC-' Rating to AT1 Notes
TURKIYE SISE: Fitch Upgrades LongTerm IDR to 'B+'
U N I T E D K I N G D O M
ARDONAGH GROUP: S&P Assigns 'B-' ICR, Outlook Stable
BILLING AQUADROME: Bought Out of Administration by Meadow Bay
FLAT CAP: Two Hotels Enter New Management Contracts
LUNAZ GROUP: Enters Administration, Halts Operations
MUJI: European Unit Set to Go Into Administration
REDCAT PUB: Enters Administration, Five Sites Shut Down
THAMES WATER: Owners Refuse to Provide GBP500MM Cash Injection
VANQUIS BANKING: Fitch Affirms 'BB' LongTerm IDR, Outlook Now Neg.
X X X X X X X X
[*] BOOK REVIEW: Bailout: An Insider's Account of Bank Failures
- - - - -
=============
B E L G I U M
=============
TEAM.BLUE FINCO: Moody's Affirms B3 CFR, Cuts Sec. Term Loan to B3
------------------------------------------------------------------
Moody's Ratings has affirmed team.blue Finco SARL's (team.blue or
the company) B3 corporate family rating and B3-PD probability of
default rating. Concurrently, Moody's has downgraded the instrument
ratings to B3 from B2 on the EUR1.110 billion senior secured first
lien term loan B that is being upsized via a EUR250 million add-on
issuance (due 2028), the EUR50 million senior secured delayed draw
term loan (due 2028) and the EUR99 million senior secured revolving
credit facility (RCF; due 2027).
The downgrade of the senior secured term loans ratings to B3 is a
result of an increase of first lien debt in the last two years
while the 2nd lien debt remained constant at EUR200 million, no
longer providing sufficient loss absorption capacity to warrant a
notch up on the first lien debt relative to the B3 CFR. The outlook
remains stable.
The rating action balances the transaction currently being
contemplated by team.blue that aims at issuing a EUR250 million
add-on to the first lien debt with the company's solid operating
performance during 2023 and Moody's expectation that the company
will continue to expand its revenue and EBITDA, such that credit
metrics will be consistent with the B3 CFR in the next 12 to 18
months.
RATINGS RATIONALE
Proceeds from the proposed add-on will mostly be used to repay the
Payment-in-Kind (PIK) notes outside of the restricted group and
will add more than 1.0x to the Moody's adjusted gross debt/ EBITDA
that will rise to 8.0x on a full-year 2023 pro-forma basis.
Although Moody's-adjusted leverage is outside of the expectations
for the B3 CFR pro forma for the transaction, the rating agency
forecast continued growth will improve leverage to the expected
guidance in the next 12 months.
During 2023, team.blue's revenue grew 13% on an organic basis to
EUR525 million, driven by growth in its customer base, higher
prices, and up- and cross-selling initiatives. Company-adjusted
EBITDA grew broadly in line with revenue to EUR213 million, which
translates to around EUR208 million Moody's-adjusted EBITDA.
Additionally, even though the add-on will increase interest
payments, Moody's estimates free cash flow (FCF) generation will
remain positive at around 2-3% debt over the next 12 to 18 months.
Team.blue's CFR benefits from the company's leading market
positions in select European markets; high profitability and
operational leverage; underlying FCF generation; and the high share
of recurring revenue from subscription-based contracts with upfront
payments that provide high revenue visibility, all support the B3
CFR. Conversely, the company's overall limited scale; focus on the
mass market in the highly competitive web services industry with
relatively low barriers to entry; and the company's acquisitive
business model that may lead to a delay in the expected
Moody's-adjusted leverage reduction all constrain the rating.
LIQUIDITY
Team.blue has an adequate liquidity profile. The company had EUR147
million cash on balance as of December 2023, access to the fully
undrawn RCF of EUR99 million due in 2027. Additionally, Moody's
also expects team.blue to generate at least EUR35 million free cash
flow per year. The company primarily receives customer payments
upfront but with limited seasonality. There is one financial
covenant in the debt documentation, tested only when the RCF is
drawn more than 40%. Moody's expect the company to retain solid
capacity under this covenant.
STRUCTURAL CONSIDERATIONS
The increasing amount of first-lien instruments proportional to the
unrated EUR200 million second lien term loan means the former is
now be rated in line with the CFR at B3. The debt security includes
material assets of the company's operations, and the instruments
are guaranteed by material subsidiaries accounting for at least 80%
of consolidated EBITDA.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
The company's decision to increase debt at team.blue to repay PIK
notes outside of the restricted group is a negative governance
consideration. Even though this has no implication to the CFR,
first lien instrument ratings were downgraded to B3, in line with
CFR, due to the further increase in first lien debt proportional to
the second lien instruments.
RATIONALE FOR STABLE OUTLOOK
Team.blue's stable rating outlook reflects Moody's expectation that
the company's credit metrics will evolve in line with the B3
ratings triggers over the next 12 to 18 months. The outlook
incorporates Moody's assumption that (1) EBITDA will support a
decline in Moody's adjusted gross leverage to below 7.5x; (2) there
will be no significant increase in leverage from any future
debt-funded acquisitions or shareholder distributions; (3) and the
company will maintain at least adequate liquidity.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Positive rating pressure could develop over time if (1) the company
continues to improve its business profile and grow its revenue and
EBITDA; (2) Moody's-adjusted leverage (R&D capitalized) improves to
below 6.0x; (3) Moody's-adjusted FCF/debt improves above 5%; and
(4) Moody's-adjusted (EBITDA – capital expenditures) / interest
expense improves remains above 2.0x, all on a sustained basis.
Adequate liquidity and financial policy clarity are also important
considerations.
Conversely, negative rating pressure could develop if (1) the
company's revenue and EBITDA growth is weaker than expected such
that Moody's-adjusted leverage (R&D capitalised) remains above
7.5x; (2) FCF turn negative or Moody's-adjusted (EBITDA – capital
expenditures)/ interest expenses weakens to below 1.3x, all on a
sustained basis; or (3) if liquidity deteriorates.
The principal methodology used in these ratings was Business and
Consumer Services published in November 2021.
COMPANY PROFILE
Headquartered in Ghent, Belgium, team.blue is a leading provider of
digital presence enablement tools in select European markets. The
company was formed by the merger of Combell Group (Belgium),
TransIP (the Netherlands) and Register Group (Italy) in 2019. The
company primarily focuses on the mass market and its customer base
is mostly composed of small and medium-sized enterprises (SMEs) as
well as private individuals. The company's products include domain
name registrations, web hosting, applications and related
solutions. The company is owned by founders of the predecessor
companies and the private equity company Hg Capital.
In the 12 months that ended December 31, 2023, team.blue reported
revenues of EUR525 million and company-adjusted EBITDA (including
pro forma adjustments for acquisitions) of EUR213 million,
according to unaudited financials.
===========
F R A N C E
===========
CASINO GROUP: Simpson Thacher Advises Quatrim Noteholders
---------------------------------------------------------
Simpson Thacher advised the ad hoc group of noteholders of Senior
Secured Notes issued by Quatrim S.A.S. in connection with the
successful completion of a comprehensive restructuring by Casino
Group, the French-headquartered international food retailer. The
transaction sees the group benefit from EUR1.5 billion of new money
and a conversion of EUR3.5 billion of existing debt to equity.
Quatrim owns 100% of the shares in Immobiliere Groupe Casino, which
owns the development and management of properties, including
hypermarket, supermarket, convenience stores, many of which are
leased to Casino Group entities. The noteholders will see their
notes paid down throughout the term of the notes in accordance with
an asset disposal plan.
Casino (and the wider food retail industry) had faced significant
headwinds in recent years. Stretched by an EUR11 billion debt
burden and liquidity issues, the group entered French conciliation
protective measures last year. This restructuring, implemented
using a cramdown under an accelerated safeguard plan in the Paris
Commercial Court, is one of the most high profile European
restructuring transactions in the past year.
The Simpson Thacher team includes Partners Adam Gallagher, Marc
Hecht and Nicholas Baker (New York), Counsel Sian Perez, and
Associates Dasha (Daria) Bechade, Ryan Edge, Philip DiDonato (New
York) and Chloe Potter (Restructuring); and Partner Nicholas Shaw,
Counsel Uma Sud and Associate Iakovos Anagnostopoulos (Capital
Markets). All attorneys are based in London unless otherwise
stated.
FNAC DARTY: Fitch Rates EUR500MM Sr. Unsec Bond 'BB+(EXP)'
-----------------------------------------------------------
Fitch Ratings has assigned FNAC Darty SA's (FNAC Darty)
(BB+/Stable) EUR500 million prospective bonds an expected long-term
rating of 'BB+(EXP)'/'RR4'. The proceeds, together with outstanding
cash, will be used to fully repay 2024 bond maturities and up to
EUR300 million of the outstanding 2026 bonds. Fitch will assign a
final rating to the issue upon receipt of final documentation
conforming to information already received.
FNAC Darty's 'BB+' Long-Term Issuer Default Rating (IDR) reflects
its leading market position in its core French market, with a
diversified product and format offering, solid omnichannel
capabilities and a large, well-recognised store network nationwide,
creating effective barriers to entry. Fitch's expectation of
continued free cash flow (FCF) generation, which resumed in 2023 as
working capital normalised, supports the rating in terms of the
financial profile, together with prospects for de-leveraging from
2024.
The group's prudent financial policy, flexibility around management
of operating leases and low execution risk through its franchising
model also support the rating. This is balanced by geographical
concentration, modest scale, a low profit margin compared with many
other omnichannel non-food retailers and weak interest cover for
the rating.
The Stable Outlook is supported by Fitch's view of gradual top-line
recovery in consumer electronics and household appliances demand
from 1H24 in France once consumer confidence gradually improves,
together with tight cost control, which Fitch expects will protect
margins. Based on a satisfactory liquidity profile to accommodate
the upcoming 2024 bond maturity, Fitch views refinancing risk as
manageable if the proposed refinancing transaction is cancelled.
KEY RATING DRIVERS
Improved Maturities Post-refinancing: The proposed EUR500 million
notes will push short- and medium-term bond maturities to 2029,
after repaying the EUR300 million bonds due in May 2024, and
together with outstanding cash EUR300 million of the EUR350 million
2026 bonds. Fitch views the transaction as an opportunistic
refinancing, and despite a potentially higher interest burden,
expects the EBITDAR fixed-charge cover ratio to remain at 2.1x,
broadly in line with its previous expectations.
Resilient Business Model: Despite a tough market environment in
2023, FNAC showed continued resilience by exhibiting a moderate
like-for-like revenue decline of -1.1% against -4.3% for the
overall French market. Fitch expects the volumes decline suffered
by appliances and electronics in 2023 to stabilise and gradually
recover from 2H24 as consumer confidence adjusts to a moderating
inflationary environment.
FNAC's business resilience was tested during the pandemic. Despite
business disruption leading to closure of stores during lockdowns
in 2020 and 2021, the group's resilient performance proved its
solid omnichannel capabilities, thanks to its ability to serve
customer demand from its digital platform with limited pressure on
profitability. Exposure to the less cyclical editorial sector for
broadly one-fifth of revenue provides some stability against more
cyclical discretionary demand in certain product categories in
consumer electronics and household appliances.
Good Profitability Despite Inflation: FNAC Darty is focused on the
less commoditised premium retailing sector, which Fitch believes
allows it to protect gross margins from inflation pressures by
moderate price increases. Overall, due to price pass-through the
company was able to protect its gross margin and limit
like-for-like revenue contraction to -1.1% in 2023. Fitch expects
the gross margin to stabilise over the rating horizon, while a
longer inflationary environment increasing pressure on household
disposable income could constrain demand, particularly for longer
life items in domestic appliances and electronics.
Fitch-calculated EBITDAR margins decreased to approximately 6.8% in
2023 from 7.2% in 2022, but were in line with its expectations.
This reflected inflationary pressure on operating expenses (mostly
wages and energy costs) that the company could not fully offset
with cost-efficiency measures, although Fitch expects further
cost-savings to materialise from 2024.
FCF Generation Driving Deleverage: Fitch expects trading recovery
to translate into FCF to sales margins of 1%-1.2% from 2024. Fitch
projects this will gradually bring lease-adjusted EBITDAR net
leverage below 3.5x by 2024 (2023:3.7x) and approximately 3.0x by
2025, in line with the net leverage metrics for a 'BB' category,
according to Fitch's Non-Food Retail Navigator.
Geographic Concentration; Strong Position: The group has an
international presence in Europe with operations in Iberia,
Switzerland, Belgium and France. However, it still has a strong
concentration in France, which Fitch estimates contributes
approximately 80% of revenue and EBITDA. This aspect is offset by
FNAC Darty's strong position as the leading omnichannel retailer in
consumer electronics, household appliances and editorial products
in the country, as well as its business model characteristics,
which lead to effective barriers to entry.
Effective Barriers to Entry: FNAC Darty's large market presence in
France benefits from a widely present multi-format store network of
838 stores in France and Switzerland, and would be difficult to
replicate. Its strong product offering is complemented by a
well-established online platform and a range of repair and care
service bundles available under a membership subscription at a
monthly fee. This enhances the stickiness of its customer base and
cross-selling potential. FNAC Darty has been able to maintain its
market share in its core markets, despite the disruptive market
entry of pure online player Amazon.
Capital-light Expansion: The group operates over 43% of its network
under an asset-light franchising model, which provides a footprint
in smaller cities in its core market, and reduces implementation
risk in its expansion, both domestically and into international
markets.
Good Financial Flexibility: FNAC Darty's liquidity profile is good.
Fitch views FNAC Darty's property portfolio and lease structure as
a competitive advantage versus sector peers. Fitch recognises the
financial flexibility that FNAC Darty's operating leases provide to
the group, with contract provisions that allow it to shorten
renewal terms from the nine years average under the original
contract to four to five years. However, contracts do not usually
include exit clauses linked to store-based profitability metrics.
Furthermore, the company's EBITDAR fixed-charge cover ratio at
2.1x-2.2x over the rating horizon remains weak for the rating.
DERIVATION SUMMARY
FNAC Darty's rating reflects its leading market position,
omnichannel capabilities, product offering and good cash-flow
generation prospects, constrained by its low operating
profitability and currently weak leverage and coverage metrics.
FNAC Darty's exposure to the relatively volatile product categories
of consumer electronics and household appliances markets is
somewhat mitigated by editorial products and other services.
Compared with Ceconomy AG (BB/Stable), and El Corte Ingles S.A.
(ECI, WD in August 2022 at BB+/Stable) FNAC Darty has smaller
scale. ECI has high geographic concentration like FNAC Darty and
exposure to premium sectors, but it has larger product
diversification through its department store model, complemented by
its food retail formats, as well as larger exposure to services
including its travel agency business.
FNAC Darty has superior profitability to Ceconomy, driven by its
stronger focus on premium sectors and a demonstrated ability to
pass through price increases protecting margins, which remain lower
than ECI due to lower volumes and product mix. However, FNAC
Darty's profitability remains weaker than other non-food retail
peers like Pepco Group N.V. (BB/Stable), Kingfisher plc
(BBB/Stable) and Mobilux 2 SAS (B/Positive).
Additionally, similar to Ceconomy and other non-food retail peers,
FNAC Darty has a conservative financial policy and a well-managed
leased property portfolio.
KEY ASSUMPTIONS
- Revenue growth normalising at about 1.4%-1.8% per year between
2024 and 2026.
- EBITDA margin gradually recovering towards 5% over the rating
horizon (2023: 3.8%).
- Annual lease expenses about EUR235 million.
- Stable capex at about 1.5% of total sales.
- Neutral working capital movements between 2024 and 2026.
- Dividends of about 40% of the prior year's net income for 2024
stabilising towards 30% over the rating horizon, in line with
management's guidance.
- Fitch has included EUR130 million of proceeds from the Comet
Court of Appeal decision in favour of FNAC Darty (EUR96 million as
part of the overall cash position as of end-December 2023 and EUR34
million cash inflow in 2024).
- Successful refinancing of the May 2024 bonds.
- No M&A.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade:
- Greatly improving scale and geographical diversification without
materially hampering profitability, with EBITDAR margin
(Fitch-defined) sustained above 9% and FFO margin above 6.0%.
- EBITDAR net leverage below 2.5x on a sustained basis, supported
by a consistent conservative financial policy.
- EBITDAR fixed-charge cover above 3x.
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade:
- Decline in profitability and like-for-like sales, due to
increased competition or a weakened business product mix, with
EBITDAR (Fitch-defined) and FFO margins remaining below 5% and 2%,
respectively.
- EBITDAR fixed-charge cover below 1.6x.
- EBITDAR net leverage remaining above 3.5x on a sustained basis.
- Neutral to negative FCF generation eroding liquidity
LIQUIDITY AND DEBT STRUCTURE
Satisfactory Liquidity: The group's readily available unrestricted
cash balance at end-2023 was EUR809 million, after Fitch restricts
EUR312.5 million of cash in connection to seasonal working capital
swings, which record a peak to trough difference of about EUR500
million. Fitch calculates the EUR312.5 million value as the
difference between the year-end cash balance and the weighted
average net working capital during the year.
Fitch has considered the EUR96 million proceeds from the Comet
Court of Appeal decision in favour of FNAC Darty as part of the
overall liquidity position as of end-December2023, and the
remaining EUR34 million as a cash inflow in 1Q24. In addition, the
company has access to a EUR500 million undrawn revolving credit
facility due in March 2028 (with a two-year extension option), and
a EUR400 million short-term commercial paper programme.
The proposed refinancing would push EUR500 million bond maturities
to 2029, leaving only EUR50 million of 2026 bonds outstanding,
which could be fully repaid with a reduced delayed drawn term loan
(DDTL) line of EUR100 million maturing in March 2028 (extended from
2025) or with outstanding cash if needed.
Fitch expects liquidity to remain manageable if the proposed
transaction is cancelled as the group currently has access to an
undrawn DDTL of EUR300 million with agreed maturity of March 2028
(with a potential two-year extension option), earmarked for the
refinancing of EUR300 million notes maturing in 2024. Refinancing
risk would remain manageable as the company also has EUR350 million
of notes maturing in 2026, leaving room for an opportunistic
refinancing transaction ahead of maturities or they could
ultimately be repaid with outstanding cash.
ISSUER PROFILE
FNAC Darty is the leading omnichannel retailer in consumer
electronics, domestic appliances, editorial products in France, and
relevant market positions in Benelux, Iberia and Switzerland.
DATE OF RELEVANT COMMITTEE
19 September 2023
ESG CONSIDERATIONS
The highest level of ESG credit relevance is a score of '3', unless
otherwise disclosed in this section. A score of '3' means ESG
issues are credit-neutral or have only a minimal credit impact on
the entity, either due to their nature or the way in which they are
being managed by the entity. Fitch's ESG Relevance Scores are not
inputs in the rating process; they are an observation on the
relevance and materiality of ESG factors in the rating decision.
Entity/Debt Rating Recovery
----------- ------ --------
FNAC Darty SA
senior unsecured LT BB+(EXP) Expected Rating RR4
=============
G E O R G I A
=============
GEORGIA: Moody's Affirms 'Ba2' Issuer Ratings, Outlook Now Stable
-----------------------------------------------------------------
Moody's Ratings changed the outlook to stable from negative on
Georgia's government credit ratings and affirmed the local and
foreign currency long-term issuer ratings and foreign currency
senior unsecured rating at Ba2.
The change to a stable outlook reflects Moody's assessment that the
balance of risks has returned to stable, with a mix of positive and
negative factors. On the positive side, while Moody's had
previously assessed material downside risks to the economy related
to Russia's invasion of Ukraine, recent developments have shown
significant economic resilience. Moody's expects a solid
macroeconomic performance to continue. Georgia's economic
institutions have contributed substantially to the country's
resilience. However, on the downside, concerns over governance at
the National Bank of Georgia (NBG, the central bank) have developed
as management structure changes raise questions around central bank
independence with potential negative implications for the
relationship with the International Monetary Fund (IMF). Moreover,
geopolitical risks stemming from Russia's invasion of Ukraine
remain high, with uncertainties around spillovers from Russia's
conflict with Ukraine and evolving strategic position in the region
likely to persist.
The affirmation of Georgia's Ba2 ratings reflects the strength of
its macroeconomic and fiscal policy frameworks, as well as the
economic policy institutions' commitment to them. This has
contributed to better than expected growth outcomes in 2022 and
2023, including thanks to effective management of the global
inflationary shock. Georgia's continued cooperation with its
development partners, a manifestation of institutional strength, is
critical to building economic and fiscal resilience and remains an
important underpinning of the current rating. The rating is also
supported by high fiscal strength, with a broadly stable or even
gradually falling government debt burden at moderate levels and
strong debt affordability. These strengths continue to be balanced
against Georgia's small economy; and very high geopolitical risk in
particular in the aftermath of Russia's invasion of Ukraine.
Georgia's local- and foreign-currency country ceilings are
unchanged at Baa1 and Baa3, respectively. The four-notch gap
between the local currency ceiling and the sovereign rating
reflects a relatively small government footprint in the economy and
strong institutions which are predictable and reliable in terms of
policy action, notwithstanding a relatively high current account
deficit and ongoing domestic political risks that point to some
country risk. The two-notch gap between the foreign currency
ceiling and the local currency ceiling incorporates Georgia's
external vulnerabilities including a relatively high current
account deficit and still high levels of dollarization in the
economy which increase transfer and convertibility risks.
RATINGS RATIONALE
RATIONALE FOR STABLE OUTLOOK
MACROECONOMIC AND FISCAL RESILIENCE TO GEO-POLITICAL SHOCKS WILL BE
SUSTAINED
Moody's expects GDP growth in Georgia to remain solid, supported by
strong real wage growth and employment which will drive consumer
demand growth to play a greater role following the robust recovery
in investment, tourism and construction which drove overall growth
in 2022 and 2023. Moody's expects growth will stabilize at 5.5% in
2024 and remain around potential growth of 5-5.5% in the medium
term, following 11.0% in 2022 and 7.5% in 2023. Stronger confidence
in Georgia's economic resilience attenuates the potential spillover
risks of Russia's invasion of Ukraine, which was a driver of the
negative outlook on the sovereign rating announced in April 2022.
In line with the economic recovery and consistent with Georgia's
fiscal policy framework, Moody's also expects fiscal repair to
continue and fiscal strength to remain very strong. After the
budget recorded a small surplus in the first half of 2023 supported
by buoyant fiscal revenues, Moody's estimates a full year deficit
of around 2.6% of GDP for 2023 and expects a narrowing to 1.1% in
2024. Robust nominal GDP growth and small budget deficits will
combine to lower Georgia's general government debt to GDP ratio
gradually, from already moderate levels of 38.3% in 2023, towards
35.4% in 2025, well below the debt burden of similarly-rated
sovereigns.
Long a source of external vulnerability, Georgia's current account
deficit has continued to narrow and seen an improvement which
Moody's assesses to be structural, reflecting higher domestic
savings due to greater public saving, as fiscal repair has
continued. At the same time, private savings have also risen,
driven by cyclical increases in incomes, as well as structural
pension reforms implemented in previous years.
WEAKENING INSTITUTIONAL AND GOVERNANCE STRENGTH
While Georgia's institutional strength has long been a support to
the rating and remains strong compared to peers, Moody's assesses
that the strength of executive and legislative institutions is
weakening.
In June 2023, changes to the NBG law created the post of First Vice
President, which changed the existing structure for the succession
of senior officials in the Bank. The First Vice President was added
to the three existing Vice Presidents of the Bank, and will
deputize for the President in the event of the latter's absence.
This alteration in the management structure, in Moody's view has
weakened the governance of the NBG.
In addition to questions related to the current organizational
structure, the manner in which these changes were executed raise
questions around transparency of executive institutions. In
particular, the changes were not fully discussed with the IMF prior
to their enactment as required in Georgia's current Stand-By
Arrangement. As a result, the progress of the Stand-By Arrangement
was delayed in July 2023 because of the IMF's concerns over
institutional independence. In Moody's view, this represents a
notable change in Georgia's relationship with the IMF, which had
been very close and effective in terms of support for the country's
economic and institutional development.
In addition, in September 2023, the NBG altered the rules framework
around the enforcement of Western sanctions on Georgian citizens,
which essentially required any Georgian sanctions targets to be
initially convicted in a domestic court prior to internationally
based sanctions being enforced. In Moody's view this raises risks
in particular for the financial sector, since international
financial institutions may be uncertain about Georgian banks
meeting international sanctions requirements.
Since the emergence of these issues, discussions at senior IMF and
NBG official level and technical official level have taken place
regularly but at this point no resolution has yet been reached.
With no confirmed resolution, these issues risk undermining
perceptions of the independence of the central bank and complicate
the sanctions enforcement regime for banks, potentially hindering
monetary policy effectiveness and financial stability and
undermining the progress which has been made in macroeconomic
management, which would be credit negative.
GEO-POLITICAL RISK REMAINS ELEVATED
The geo-political risks facing Georgia remain significant given
uncertainty about developments in the conflict in Ukraine and
Russia's long-term objectives within the region.
While it appears less likely than in early 2022 that Georgia will
be directly exposed to military conflict, risks stemming from
Russian military aggression remain elevated. At the same time,
Russia has continued to pursue regional objectives through
political interference, which has been and will remain a source of
risk for Georgia.
Georgia has so far succeeded in managing competing geo-political
pressures following Russia's invasion of Ukraine, which has allowed
for solid economic and fiscal outcomes. For example, Georgia has
successfully engaged a series of reforms designed to facilitate
eventual EU accession, while maintaining economic relations with
Russia. However, the evolving role of Russia in the region, as well
as the challenges posed by on-going sanctions on Russia's economy,
add to the complexity of maintaining such relationships in the
medium term.
RATIONALE FOR RATING AFFIRMATION
The affirmation of Georgia's Ba2 ratings reflects the strength of
its macroeconomic and fiscal policy frameworks, as well as the
economic policy institutions' commitment to them. This has
contributed to better than expected growth outcomes in 2022 and
2023, including thanks to effective management of the global
inflationary shock. Georgia's continued cooperation with its
development partners, a manifestation of institutional strength, is
critical to building economic and fiscal resilience and remains an
important underpinning of the current rating.
The rating is also supported by high fiscal strength, with, a
gradually falling government debt burden at moderate levels and
strong debt affordability.
These strengths continue to be balanced against Georgia's small
economy; and very high geopolitical risk in particular in the
aftermath of Russia's invasion of Ukraine.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Georgia's ESG Credit Impact Score reflects moderately negative
exposure to demographic and employment challenges and, to a lesser
extent, environmental, largely physical climate, risks. These are
mitigated by Georgia's sustained track record of institutional
strengths and policy effectiveness, which have contributed to
ongoing increases in incomes and, together, support capacity to
respond to social and environmental challenges.
Georgia's overall exposure to environmental risks is driven by
moderately negative risks related to physical climate change,
notably heat stress, exacerbated by relatively high sensitivity
related to the large size of the agriculture sector as employer; a
low proportion of the population with access to safe water also
points to environmental risks.
Exposure to social risks is also a potential source of future
credit risks due to an ageing population, high rates of youth
unemployment, and only modest spending on health and education,
although life expectancy is relatively high. These negative risks
contrast with solid enrollment rates in education and a relatively
high level of access to basic services.
At this stage, Governance does not pose significant risks and
Georgia's track record suggests robust capacity to address some of
the environmental and social challenges highlighted above. Georgia
has had significant success in building institutional capacity and
economic reforms which have supported flexibility in labour and
product markets, supporting moves towards higher value added
activities in sectors like agriculture and increasing access to a
broader range of export markets. However, Moody's will continue to
monitor developments which pertain to the strength of the country's
institutions to assess whether recent developments reflect deeper
institutional weakening than currently assessed.
GDP per capita (PPP basis, US$): 20,243 (2022) (also known as Per
Capita Income)
Real GDP growth (% change): 11% (2022) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 9.8% (2022)
Gen. Gov. Financial Balance/GDP: -2.4% (2022) (also known as Fiscal
Balance)
Current Account Balance/GDP: -4.5% (2022) (also known as External
Balance)
External debt/GDP: 94.3% (2022)
Economic resiliency: baa2
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On March 21, 2024, a rating committee was called to discuss the
rating of the Georgia, Government of. The main points raised during
the discussion were: The issuer's economic fundamentals, including
its economic strength, have materially increased. The issuer's
institutions and governance strength, have materially decreased.
The issuer's governance and/or management, have materially
decreased. The issuer's fiscal or financial strength, including its
debt profile, has materially increased. The systemic risk in which
the issuer operates has not materially changed. The issuer's
susceptibility to event risks has not materially changed.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Upward pressure on the rating could develop if issues around the
credibility of Georgia's institutions and governance are resolved
and relationships with the IMF and other international financial
institutions remain as effective as in the past. This would support
ongoing reforms to sustainably increase domestic savings, including
lifting public savings, which would help support the ongoing
improvement in Georgia's fiscal metrics and reduce external
vulnerability. Economic reforms that foster greater economic
diversification and higher productivity growth over time would
improve Georgia's economic strength and potentially support a
higher rating.
Signs that the weakening of executive and legislative institutions
is deeper than currently assessed, or has material negative
implications for monetary policy effectiveness or financial
stability would put downward pressure on the rating. Downward
pressure on the rating could also stem from an escalation or
crystallisation of domestic or geopolitical risks. A sharp widening
of the current account deficit, leading to a material increase in
external vulnerability risks, would also place downward pressure on
the rating.
The principal methodology used in these ratings was Sovereigns
published in November 2022.
=============
I R E L A N D
=============
NORDIC AVIATION: Moody's Affirms 'B2' CFR, Outlook Remains Stable
-----------------------------------------------------------------
Moody's Ratings has affirmed the B2 corporate family rating of
Nordic Aviation Capital Designated Activity Company (NAC) and the
backed B2 ratings of the senior secured notes and senior secured
Term Loan B of NAC Aviation 29 Designated Activity Company (NAC
29). The outlook remains stable.
RATINGS RATIONALE
Moody's affirmed NAC's B2 CFR based on the company's able execution
of its ongoing business transformation since emerging from
bankruptcy in 2022, led by its experienced management team, which
has strengthened its financial position. The affirmation also
reflects NAC's prospects for good operating results in 2024 and its
effectively managed capital and liquidity positions. The ratings
affirmations also consider the company's credit challenges,
including its shorter average remaining lease term compared to
peers, which weakens revenue transparency; its high reliance on
secured debt sources that encumbers its aircraft fleet and
contributes to debt maturity concentrations in 2026; and its
concentration among its top three customers.
Governance considerations are also a key driver of the ratings,
relating to NAC's board-directed evaluation of strategic
alternatives to maximize shareholder value, leading to uncertainty
regarding NAC's continuity of ownership, strategy, and financial
priorities, as well as offsetting positive performance developments
in the past year.
NAC continues to execute its strategy of improving fleet
composition by divesting certain non-core regional aircraft and
investing in narrow-body jets. The company has a strong position as
a lessor of turboprop and regional jet aircraft, but its ongoing
plan to gain share in the leasing of narrow-body aircraft, while
positive for both fleet and customer diversity, nevertheless
exposes it to strong competition from well-established and able
competitors that have solid financial standing and lower cost of
funding. The average age of NAC's fleet improved moderately to 8.1
years at December 31, 2023, while its average remaining lease term
improved by about one-half year to 3.9 years, both as a result of
divestitures of older aircraft and acquisition of newer models, but
both measures still compare unfavorably to peers. The company has a
relatively high 45% top 10 customer concentration (net book value
basis), mostly attributable to its sizeable relationships with
operators Indigo, LOT and Airlink, which together total over 25%,
increasing operating risks, but NAC has succeeded in growing its
total customer count in the past year.
NAC produced respectable profitability in 2023, its first full year
of results after emerging from bankruptcy reorganization. The
company's ratio of net income to average managed assets was 1.92%
for the year, better than the median for rated peers. Earnings were
aided by higher-than-anticipated rental revenues and gains from
aircraft trading, both reflecting strong leased aircraft demand
from airlines, which has strengthened utilization, lease rates and
aircraft values. Moody's expects that air travel growth and
strengthening airline finances will continue to aid NAC's leasing
volumes and earnings prospects, though earnings and profitability
in 2024 could decline as the company continues to pare the fleet of
less-strategic aircraft, reducing revenues.
NAC's capital is adequate to cushion performance and execution
risks, given the revaluation of its fleet in connection with its
reorganization and rising values since then, as well as the
company's ongoing efforts to improve fleet composition and
operational productivity. NAC's debt-to-tangible equity ratio was
3.4x at December 31, 2023, whereas investment-grade rated peers
have measures below 3.0x. However, on a net debt basis, NAC's
debt-to-tangible equity ratio improves to 2.5x, reflecting the
firm's strong cash position.
NAC's liquidity position is aided by strong cash collections,
aircraft sale proceeds, and increased credit availability from its
upsized $650 million warehouse line. The company retired about $105
million of debt during 2023 through its buyback program. However,
NAC has a concentrated refinancing burden with approximately $1.8
billion of senior secured debts maturing in 2026, which increases
risks to its liquidity profile. NAC also has a high reliance on
secured debt that encumbers its fleet, resulting in a secured
debt-to-assets ratio of 62% at December 31, 2023, significantly
higher than peers.
The B2 backed senior secured rating assigned to NAC 29's
approximately $1.57 billion secured term debt (split between
fixed-rate senior secured notes and floating rate term loan B)
reflects the senior secured priority of these obligations in NAC's
organizational hierarchy and capital stack, their adequate asset
coverage, and the guarantee provided by parent NAC.
The outlook for NAC is stable, reflecting the company's ongoing and
well-executed plan to improve cash flows and earnings, including
through new aircraft investments while also exiting non-core
aircraft. The stable outlook also considers the company's adequate
capital position and near-term liquidity, but looming 2026
maturities. NAC's board's exploration of strategic alternatives is
a governance risk to financial stability that offsets positive
performance developments in the past year.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
NAC's ratings could be upgraded if the company: 1) strengthens
profitability and cash flow through improved collection
performance, fleet utilization and cost management; 2) effectively
manages existing aircraft fleet and lease risks, resulting in
improved fleet average age and average remaining lease term; 3)
diversifies its funding and reduces debt maturity concentrations;
4) maintains strong liquidity and debt-to-equity leverage below
3.5x; and 5) reduces governance risks by satisfactorily resolving
its evaluation of strategic alternatives.
NAC's ratings could be downgraded if the company: 1) produces
deteriorating operating performance, reflecting weakness in
underlying revenue drivers; 2) increases debt-to-equity leverage
above 4x; 3) materially weakens its liquidity coverage; or 4)
increases financial or governance risks resulting from its pursuit
of strategic alternatives.
The principal methodology used in these ratings was Finance
Companies Methodology published in November 2019.
SHAMROCK RESIDENTIAL 2023-1: S&P Cuts Rating on G-Dfrd Notes to CCC
-------------------------------------------------------------------
S&P Global Ratings lowered its credit ratings on Shamrock
Residential 2023-1 DAC's class F-Dfrd notes to 'B- (sf)' from 'B
(sf)' and class G-Dfrd notes to 'CCC (sf)' from 'B- (sf)'. At the
same time, S&P affirmed its 'AAA (sf)', 'AA (sf)', 'A (sf)', 'BBB-
(sf)', and 'BB (sf)' ratings on the class A, B-Dfrd, C-Dfrd, D-Dfrd
notes, and E-Dfrd notes, respectively.
The rating actions reflect its full analysis of the most recent
transaction information and the transaction's structural features.
Over 72% of the loans in the transaction at closing had been
previously restructured, and 24.8% were at least one month in
arrears. Since closing, reported arrears have further increased to
31.7%, of which 21.6% (13.9% at closing) were 90+ days past due as
of December 2023. This reflects the high proportion of loans in the
portfolio that are on a variable rate, which have been directly
affected by recent interest rate rises. Credit enhancement has
increased since closing, but at a slower pace than what S&P has
seen in similar transactions.
S&P said, "We have seen an increase in fees when compared with what
was assumed at closing. Servicing fees have been elevated because
of the increased engagement involved in the progression through the
arrears stages. The increase in other fees was queried with the
arranger and they have attributed this to an error with the cash
manager using funds from the revenue waterfall to fund fees that
should have been paid with proceeds at closing. The expense ledger
holds the amounts of excess fees that should have been used and
will be released to the waterfall in due course. We factored this
into our cash flow analysis.
"At closing, we gave credit to loans that had historically strong
pay rates, but were in 90+ days in arrears, and applied a 5.0x
adjustment to the weighted-average foreclosure frequency (WAFF)
instead of assuming 100% foreclosure frequency. We have now looked
at the loans that received this benefit and removed the benefit
from loans with decreasing pay rates. The proportion getting this
credit is now 1.8%, down from 3.4% at closing. We did not apply
this credit to any other loans in our analysis. Approximately 45%
of the loans 120+ days past due are making no monthly installments.
We considered this in our analysis."
The general reserve has been drawn to 55% of its target amount (45%
shortfall) as of the end of January 2024. The liquidity reserve
fund remains at its target.
This transaction contains a contractual floor of one-month Euro
interbank Offered Rate (EURIBOR) plus 2.5% in the transaction
documents for loans that are on a standard variable rate (SVR). S&P
said, "In the most recent period, we calculate a margin of just
1.7% on these loans. This lower yield in assets decreases the
amount flowing into the revenue waterfall. In our analysis at
closing, we gave credit to this floor. We queried this with the
servicer and it said the increases are lagged and it will work
toward reaching this floor in coming months, with a further rate
increase scheduled in April. There is a relatively high proportion
of SVR loans in this transaction (55% of the total pool) when
compared with similar transactions, which increases the sensitivity
of the notes to this floor. We have run sensitivities on the
reduction of this floor in our cash flow analysis."
S&P said, "After applying our global RMBS criteria, our credit
coverage has decreased across all rating categories. On Sept. 8,
2023, we updated our indexation, jumbo valuation, and over/under
valuations assumptions, which resulted in improved weighted-average
loss severity (WALS) at all rating categories. For the lower rating
categories, the higher arrears--specifically the gain in 90+ days
arrears--has raised the WAFF materially. The loan portfolio
benefits from a lower reperforming loan adjustment given the
portfolio's increased seasoning since closing."
Credit analysis results
RATING LEVEL WAFF (%) WALS (%) CC (%)
AAA 65.29 28.88 18.86
AA 54.82 24.77 13.58
A 48.23 18.18 8.77
BBB 40.06 14.90 5.97
BB 31.50 12.69 4.00
B 29.35 10.80 3.17
WAFF--Weighted-average foreclosure frequency.
WALS--Weighted-average loss severity.
CC--Credit coverage.
S&P said, "We consider the transaction's resilience in case of
additional stresses to some key variables, in particular defaults
and loss severity, to determine our forward-looking view. In our
view, the ability of the borrowers to repay their mortgage loans
will be highly correlated to macroeconomic conditions, particularly
the unemployment rate, consumer price inflation, and interest
rates.
"Policy interest rates in the eurozone may have peaked, although we
do not expect the European Central Bank (ECB) to start cutting
rates until the second half of 2024. Our unemployment rate
estimates for Ireland in 2023 and forecast for 2024 are 4.7% and
5.0%, respectively. Most of the borrowers in this transaction pay
variable interest rates, leading to near-term pressure from both a
cost of living and rate rise perspective. We have considered this
in both our credit and cash flow analyses.
"In our view, eurozone inflation peaked in 2022 at 8.4%. Continued
high inflation estimates in 2023 and forecasts for 2024 are at 5.5%
and 2.9%, respectively, and are credit negative for borrowers, with
some more affected than others. If inflationary pressures
materialize more quickly or more severely than currently expected,
risks may emerge. We consider the borrowers in this transaction to
be reperforming and as such they will generally have lower
resilience to inflationary pressures than prime borrowers.
"Furthermore, a decline in house prices typically decreases the
level of realized recoveries. For Ireland in 2024, we expect house
prices to increase by 1.3%, a slower pace than that seen in recent
years. We ran additional scenarios to test the effect of a decline
in house prices. The results of the sensitivity analysis indicate a
deterioration of no more than one category on the notes, which is
in line with the credit stability considerations in our rating
definitions.
"A general housing market downturn may delay recoveries. We have
also run extended recovery timings to understand the transaction's
sensitivity to liquidity risk.
"We lowered our ratings on the class F-Dfrd and G-Dfrd notes,
reflecting the deterioration in their cash flow results due to the
elevated arrears. For these junior notes, the slightly increased
credit enhancement and decreased WALS levels do not mitigate the
effect of the increased WAFF at the lower rating levels. Our
analysis also reflected the transaction's conditional prepayment
rates, higher observed fees since closing, and sensitivity to the
SVR floor. We considered their potential sensitivity to further
rises in arrears, particularly given the steep trajectory of
arrears increases and pay rate performance in recent months.
"Given the class F-Dfrd and G-Dfrd notes' sensitivity to the
stresses we apply at our 'B' rating level, we applied our 'CCC'
criteria. We performed a qualitative assessment of the key
variables, along with simulating a steady state scenario (actual
conditional prepayment rates, actual fees, no commingling stress,
and no spread compression) in our cash flow analysis.
"The class F-Dfrd notes can pass such a scenario. We therefore do
not consider their repayment to be dependent upon favorable
business, financial, and economic conditions, and we lowered our
rating on the class F-Dfrd notes to 'B- (sf)' from 'B (sf)'.
"The class G-Dfrd notes cannot pass such a scenario. We therefore
consider their repayment to be dependent upon favorable business,
financial, and economic conditions, and lowered our rating on the
class F-Dfrd notes to 'CCC (sf)' from 'B- (sf)'.
"We affirmed our ratings on the class A to E-Dfrd notes,
considering the results of our cash flow analysis. These notes are
passing at higher rating levels in our standard run, but
sensitivity was observed to runs with higher arrears levels and
elevated fees."
Shamrock Residential 2023-1 is a static RMBS transaction that
securitizes a portfolio of reperforming owner-occupied and
buy-to-let mortgage loans, secured over residential properties in
Ireland. The transaction closed in March 2023.
=========
I T A L Y
=========
BANCO BPM: Fitch Assigns 'BB' Rating to EUR500MM Subordinated Debt
------------------------------------------------------------------
Fitch Ratings has assigned Banco BPM S.p.A.'s (BBPM) EUR500 million
subordinated debt issue (ISIN: IT0005586729) due June 2034 a
long-term rating of 'BB'. The notes are issued under BBPM's EUR25
billion Euro Medium Term Note programme and qualify as Tier 2
regulatory capital.
All other issuer and debt ratings are unaffected.
KEY RATING DRIVERS
The notes are rated two notches below BBPM's 'bbb-' Viability
Rating (VR) to reflect poor recovery prospects in case of failure.
No notching is applied for incremental non-performance risk because
write-down of the notes will only occur once the point of
non-viability is reached and there is no coupon flexibility before
non-viability.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
The notes' rating is primarily sensitive to a change in the bank's
VR, from which it is notched.
The notes would be downgraded if BBPM's VR was downgraded. The
notes' rating could also be downgraded due to an increase in
notching from the bank's VR, which could arise if Fitch changes its
assessment of their non-performance relative to the risk captured
in the VR.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
The notes would be upgraded if BBPM's VR was upgraded.
ESG CONSIDERATIONS
The highest level of ESG credit relevance is a score of '3', unless
otherwise disclosed in this section. A score of '3' means ESG
issues are credit-neutral or have only a minimal credit impact on
the entity, either due to their nature or the way in which they are
being managed by the entity. Fitch's ESG Relevance Scores are not
inputs in the rating process; they are an observation on the
relevance and materiality of ESG factors in the rating decision.
Entity/Debt Rating
----------- ------
Banco BPM S.p.A.
Subordinated LT BB New Rating
EVOCA SPA: Moody's Affirms 'B3' CFR & Alters Outlook to Stable
--------------------------------------------------------------
Moody's Ratings has affirmed the B3 long-term corporate family
rating and B3-PD probability of default rating of EVOCA S.p.A. and
changed the outlook to stable from negative. Concurrently, Moody's
also assigned a B3 instrument rating to the proposed EUR550 million
guaranteed senior secured notes maturing in 2029.
Proceeds from the new proposed EUR550 million guaranteed senior
secured notes will be used to repay the existing EUR550 million
guaranteed senior secured notes maturing in November 2026. The
rating on the existing senior guaranteed senior secured notes will
be withdrawn upon repayment.
"The rating affirmation and change in outlook to stable from
negative reflect the company's lower leverage driven recovery in
operating performance as well as the proactive refinancing of its
2026 debt," says Michel Bove, a Moody's AVP-Analyst and lead
analyst for EVOCA.
RATINGS RATIONALE
The rating affirmation reflects Moody's expectations that leverage
will reduce to approximately 6.8x in 2024 from 7.6x in 2023,
further declining towards 5.6x in 2025, driven by a recovery in
revenue and enhanced profitability, which will be supporting
positive FCF generation over the same period.
The rating also factors in EVOCA's small size and the limited
diversification as well as the company's high tolerance for
leverage and the existence of PIK notes outside of the restricted
group.
Moody's expects revenue growth to be predominantly driven by the
expansion of the Professional Coffee (mainly Superautomatic)
segment, and eventually by the slower rebound in the Vending
segment. The company's leading position in the Professional Coffee
segment, together with additional price increases in 2024 and a
streamlined portfolio, will drive double-digit growth in this
segment, above industry average. The Vending (Auto & Impulse)
segment's recovery is expected to trail, with a rebound likely in
2025, in part due to fading pandemic-induced changes in trends, the
ending of a declining cycle, general fleet aging and innovation
calling for new machines sales growing the installed base.
Moody's expects profitability to improve over the next 12-18
months, owing to the implementation of efficiency measures such as
reviewing its supplier base, adjustment of personnel, and
optimizing its manufacturing process and footprint. The closure of
the Gaggio Montano plant in Italy during the course of 2022 and
2023, among other initiatives, lowered the company's cost base
leading to profitability similar to pre-pandemic levels, with
Moody's adjusted EBITA reaching EUR64 million in 2023, or a 14.5%
margin which compares favourably to the 12.6% reported in 2022.
Given this operational improvement, Moody's anticipates that free
cash flow (FCF) generation will be positive in 2024 and 2025 by
EUR10 million and EUR43 million, respectively. FCF is also
supported by the company's asset light business model with limited
capex needs.
EVOCA's high tolerance for leverage within the restricted group and
the presence of PIK notes outside of it, is a significant
constraint on its rating. The value of these PIK notes increases
substantially due to the significant coupon accruing over time.
While the PIK is not included in the Moody's adjusted metrics, it
creates an overhang risk for the rating, given the risk that these
notes may be refinanced within the restricted group once financial
flexibility improves.
LIQUIDITY
EVOCA's liquidity is good, supported by around EUR77 million of
available cash as of December 2023 and a fully available EUR80
million revolving credit facility (RCF). The proposed transaction
will also allow the company to address its refinancing requirements
well ahead of the November 2026 maturity of its EUR550 million
guaranteed senior secured notes, with no refinancing risk until the
new 2029 maturity.
Moody's expects the company to maintain ample financial headroom in
the revolving facility agreement under the springing covenant
requiring the drawn super senior leverage ratio not to exceed
1.15x, which is tested when revolving facility drawn loans less
cash and cash equivalents exceed 40% of revolving facility
commitments. A potential breach would only result in a drawstop of
the facility.
STRUCTURAL CONSIDERATIONS
The new EUR550 million guaranteed senior secured notes are rated
B3, in line with EVOCA's CFR. The super senior revolving credit
facility ranks at the top of Moody's Loss Given Default (LGD)
waterfall, followed by the EUR550 million guaranteed senior secured
notes and trade payables. The size of the revolving credit
facility is not significant enough to warrant a notching on the
notes.
The EUR210 million PIK notes outside of the restricted group mature
six months after the new guaranteed senior secured notes, are not
guaranteed by, do not cross-default with and do not have any
creditor claim on the new guaranteed senior secured notes of the
restricted group and, therefore, are not included in the leverage
calculation or the LGD waterfall.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects Moody's expectation that the company
will continue its profitable growth trajectory and that its
leverage will decrease towards 6.0x over the next 12-18 months,
mainly driven by revenue and EBITDA growth. The outlook does not
factor in any large debt-financed acquisition or shareholder
distributions.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Upward rating pressure could arise if the company: reduces its
leverage to sustainably below 5.5x on a Moody's-adjusted gross
debt/EBITDA basis; improves its interest cover (Moody's-adjusted
EBITA/interest expense) above 2.0x on a sustained basis; and
remains profitable with a Moody's-adjusted EBITA margin in the
high-teen percentages.
Conversely, negative pressure could develop if the if the company's
earnings recovery trend reverses, resulting in: leverage
persistently remaining above 6.5x on a Moody's-adjusted gross
debt/EBITDA basis; interest cover falling significantly below 1.5x;
FCF reverting to negative; or a deterioration in liquidity.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Manufacturing
published in September 2021.
COMPANY PROFILE
Headquartered in Bergamo, Italy, EVOCA S.p.A. is a global leader in
the production of professional coffee machines, and other hot and
cold beverage and food vending machines, with a particular focus on
espresso coffee, and a fast-developing presence in professional
coffee machines for the offices and food service agreements. For
2023, it generated EUR440 million in revenue and reported audited
adjusted EBITDA of EUR97 million. The company has been owned by the
private equity firm Lone Star since March 2016.
===================
L U X E M B O U R G
===================
ARRIVAL: NYSE to Delist Securities on April 1
---------------------------------------------
The New York Stock Exchange filed a 25-NSE Report notifying the
Securities and Exchange Commission it has determined to remove from
listing the securities of Arrival, effective at the opening of the
trading session on April 1, 2024.
Based on review of information provided by the Company, Nasdaq
Staff determined that the Company no longer qualified for listing
on the Exchange pursuant to Listing Rules 5250(c)(1) and 5620(a).
The Company was notified of the Staff determination on October 31,
2023. On November 7, 2023, the Company exercised its right to
appeal the Staff determination to the Listing Qualifications
Hearings Panel pursuant to Listing Rule 5815.
On January 3, 2024, the Company received an additional delist
determination for its failure to meet the requirements in Listing
Rule 5250(c)(1). A hearing on the matter was scheduled for February
8, 2024. On January 26, 2024, the Company withdrew its appeal. The
Company securities were suspended on January 30, 2024. The Staff
determination to delist the Company securities became final on
March 11, 2024.
About Arrival
Arrival's mission is to master a radically more efficient New
Method to design, produce, sell and service purpose-built electric
vehicles, to support a world where cities are free from fossil fuel
vehicles. Arrival's in-house technologies enable a unique approach
to producing vehicles using rapidly-scalable, local Microfactories.
Arrival (Nasdaq: ARVL) is a joint stock company governed by
Luxembourg law.
RADAR TOPCO: Fitch Assigns BB-(EXP) LongTerm IDR, Outlook Positive
------------------------------------------------------------------
Fitch Ratings has assigned Radar Topco SARL (Swissport) an expected
Long-Term Issuer Default Rating (IDR) of 'BB-(EXP)' with a Positive
Outlook and its planned EUR1.2 billion term loan B (TLB) due 2031
an expected long-term rating of 'BB+(EXP)'. The assignment of final
ratings is contingent on the receipt of final documents conforming
to information already reviewed and the successful placement of the
TLB.
The IDR reflects Swissport's market position in global ground
handling and cargo handling aviation, a contracted business model,
a diversified customer base and largely stabilised operations
post-pandemic. The rating also reflects the company's planned
capital structure, which will increase debt to fund one-off
dividends, leading to an increase in pro-forma leverage for 2024
but still remain within the sensitivities for the rating. Fitch
forecasts moderate growth in revenues and EBITDA margin
improvement, along with moderately positive free cash flow from
2025, leading to decline in EBITDAR leverage which underpins the
Positive Outlook on the IDR.
The TLB rating is notched up twice from 'BB-' IDR under Fitch's
'Corporates Recovery Ratings and Instrument Ratings Criteria' for
senior secured instruments.
KEY RATING DRIVERS
Strong Market Position: Swissport benefits from strong market
positions in global ground and cargo handling of B2B aviation
services, with market shares of 15% and 13%, respectively. It has
an established record of successfully operating in these industry
segments on a global scale, which enables it to contract with large
customers such as Deutsche Lufthansa AG (BBB-/Stable), Turkish
Airlines (B+/Stable), United Airlines, Inc. (BB-/Stable) and
Qantas.
Contracted Business Model: Ground handling and cargo handling
services are usually provided under a fairly standardised
International Air Transport Association's standard ground handling
agreement (SGHA), which includes all the key parameters for the
service captured. These contracts usually cover three to five years
and provision of services for an airline or a group of airlines
operating in a given airport. The SGHA incorporates some
cost-escalation clauses, which limit inflation risk for the service
provider, in its view.
Volume Risk: The SGHA does not protect Swissport from volume risk,
which may arise from changes in a carrier's flight operations plan,
subject to notice of a few days, due to changes in the carrier's
network plan or market conditions. This volume risk was most
evident during the pandemic, when the company posted materially
lower EBITDAR compared with 2019 (average Fitch-defined EBITDAR for
2020-2022 at EUR179 million versus EUR348 million in 2019).
Overall, the contracts provide better visibility of revenues and
margins compared with airlines, while remaining exposed to the same
industry-wide demand risk.
Improving Business Profile: Swissport has made good improvement of
its contract base with approximately 85% now including
inflation-indexation clauses, enhancing resilience and protecting
margins. This mechanism was lacking in the past, leading to cost
increases not being perfectly reflected in tariffs and eroding
EBITDA margins. Swissport negotiates separate contracts with each
airline at the airport level, reducing the risk of major revenue
impact from individual contract losses. Swissport's contracts have
an average duration of 3.5 years. Its top 10 customers represent
34% of revenues.
Personnel Management an Important Driver: In the post-pandemic era,
effective human resource management has even more importance for
ground handling services. Personnel costs historically accounted
for around 65% of revenues for Swissport. The company has globally
managed its workforce adequately, minimising strikes compared with
direct competitors. As of late 2023, staff unionisation stood at
around 60%, with constructive dialogue prevailing.
Swissport has nearly restored its workforce to pre-pandemic levels,
but faced margin pressures in 2022 due to increased labour costs
not yet being fully reflected in contracts. Its profitability
materially improved in 2023 and Fitch expects the EBITDAR margin to
improve to 13.9% in 2027 from 11.5% in 2023, driven by faster
growth in the higher-margin cargo business as well as management's
cost-saving plan.
Leveraged Capital Structure: Swissport's planned refinancing, if
completed, will lead to a sustainable capital structure, barring
major exogenous shocks. Swissport's plan to arrange a seven-year
EUR1.2 billion TLB along with a 6.5-year EUR250 million revolving
credit facility (RCF) extends its debt maturity, but also leads to
higher interest costs. This financing, which will be used to return
EUR505 million to shareholders and repay most of the existing debt,
increases leverage but to materially lower levels than in 2019.
Fitch forecasts EBITDAR leverage at 4.2x at end-2024. With moderate
growth and margin expansion driven by product mix shift and cost
savings, Fitch expects the metric to fall to its positive rating
trigger of 3.8x by end-2025. Fitch has not assumed any early debt
repayment, or additional indebtedness across the plan.
Cash Flow Generation Potential: Fitch forecasts Swissport will
generate positive FCF due to its asset-light business model (capex
at less than 3% of revenues) and despite higher cash interest
payments under its new capital structure, while Fitch expects
broadly neutral working capital. Based on management feedback,
Fitch expects cash to build up and be partially used for
opportunistic bolt-on acquisitions. Fitch is not assuming any
excess cash to be used for early debt repayment or shareholder
returns (other than assumed for its refinancing).
Senior Secured Instrument Rating: The 'BB+' rating for the TLB
reflects Fitch's 'Corporates Recovery Ratings and Instrument
Ratings Criteria' where senior secured instrument ratings benefit
from a two-notch uplift from 'BB-' issuer rating. Should the IDR be
upgraded by one notch, the TLB rating would remain the at the
current level, reflecting the criteria.
DERIVATION SUMMARY
Fitch views Avia Solutions Group PLC (BB/Stable) as a peer for
Swissport given B2B aviation services offerings by both companies.
While specific services between the two differ, Fitch sees
underlying linkage to the aviation industry dynamics as comparable.
Fitch views Swissport's business profile as slightly weaker than
that of Avia Solutions, which benefited from a faster post-pandemic
recovery, has faster growth prospects and benefits from wider range
of services although, Swissport benefits from a larger revenue
base, better contracted business profile and greater geographical
diversification.
Compared with Inpost S.A. (BB/Stable), Swissport has stronger
barriers to entry and greater geographic diversification but Inpost
generates higher EBITDA margins. Swissport's credit profile places
it adequately in the 'BB' rating category, given its financial
leverage, and is comparable with Avia and Inpost, and better than
that of SGL Group ApS (B/Stable), whose small size, debt capacity
and credit metrics place it in the 'B' rating category.
KEY ASSUMPTIONS
- Low-to-mid single-digit growth in ground handling and cargo
volumes and pricing to 2026
- Gradual EBITDAR margin expansion to 13.6% in 2026 from 11.5% in
2023
- Issuance of EUR1.2 billion TLB to repay existing debt and fund
EUR505 million dividends in 2024
- Stable capex at around 2.5% of sales to 2026
- No dividends after the refinancing, no M&A
RATING SENSITIVITIES
Factors That Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
- EBITDAR gross leverage below 3.8x on a sustained basis
- EBITDAR fixed charge coverage above 1.8x on a sustained basis
Factors That Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
- EBITDAR gross leverage above 4.8x on a sustained basis
- EBITDAR fixed charge coverage below 1.5x on a sustained basis
- Structural or cost inflation-driven decline in EBITDAR margins to
below 10-11%
LIQUIDITY AND DEBT STRUCTURE
Adequate Liquidity: Following the planned refinancing, Swissport
will have about EUR292 million of cash and about EUR170 million
available and undrawn under its EUR250 million RCF (about EUR80
million utilized for guarantees). This compares with almost neutral
FCF forecast in 2024 (excluding the refinancing but including
higher interest costs) post-transaction and about EUR20 million of
short-term debt. Fitch expects liquidity to remain adequate through
to 2027 as Fitch forecasts Swissport to remain FCF-positive from
2025 and for the RCF to remain undrawn in the absence of
debt-funded acquisitions.
ESG CONSIDERATIONS
The highest level of ESG credit relevance is a score of '3', unless
otherwise disclosed in this section. A score of '3' means ESG
issues are credit-neutral or have only a minimal credit impact on
the entity, either due to their nature or the way in which they are
being managed by the entity. Fitch's ESG Relevance Scores are not
inputs in the rating process; they are an observation on the
relevance and materiality of ESG factors in the rating decision.
ISSUER PROFILE
Swissport is a global leading provider of ground and cargo handling
services for the aviation industry.
Entity/Debt Rating
----------- ------
Radar Topco SARL LT IDR BB-(EXP) Expected Rating
senior secured LT BB+(EXP) Expected Rating
=========
M A L T A
=========
ESPORTS ENTERTAINMENT: Financial Woes Raise Going Concern Doubt
---------------------------------------------------------------
Esports Entertainment Group, Inc. disclosed in a Form 10-Q Report
filed with the U.S. Securities and Exchange Commission for the
quarterly period ended December 31, 2023 that substantial doubt
exists about its ability to continue as a going concern.
According to the Company, it has determined that certain factors
raise substantial doubt about its ability to continue as a going
concern within the next 12 months.
The Company considered that it had an accumulated deficit of $203.3
million as of December 31, 2023, and that it has had a history of
recurring losses from operations and recurring negative cash flows
from operations as it has prepared to grow its esports business
through acquisition and new venture opportunities. At December 31,
2023, the Company had $1.1 million of available cash on-hand and
net current liabilities of $7.8 million. Net cash used in operating
activities for the six months ended December 31, 2023 was $4.1
million, which includes a net loss of $21.8 million.
The Company also considered its current liquidity as well as future
market and economic conditions that may be deemed outside the
control of the Company as it relates to obtaining financing and
generating future profits.
As of December 31, 2023, the Company had $7.6 million in total
assets, $12.5 million in total liabilities, $11.8 million in total
mezzanine equity, and $16.7 million in total stockholders'
deficit.
In determining whether the Company can overcome the presumption of
substantial doubt about its ability to continue as a going concern,
the Company may consider the effects of any mitigating plans for
additional sources of financing. The Company identified additional
financing sources it believes, depending on market conditions, may
be available to fund its operations and drive future growth, which
includes:
(i) approximately $1.4 million of net proceeds from the Secured
Note with the holder of the Series C Convertible Preferred Stock
and the Series D Convertible Preferred Stock;
(ii) the potential expected proceeds from future offerings, where
the amount of the offering has not yet been determined; and
(iii) the ability to raise additional financing from other
sources.
These plans are likely to require the Company to place reliance on
several factors, including favorable market conditions, to access
additional capital in the future. These plans were therefore
determined not to be sufficient to overcome the presumption of
substantial doubt about the Company's ability to continue as a
going concern.
A full-text copy of the Company's Form 10-Q is available at
https://tinyurl.com/53y5kme4
About Esports Entertainment Group
St. Julians, Malta-based Esports Entertainment Group, Inc. is a
diversified operator of iGaming, traditional sports betting and
esports businesses with a global footprint. The Company's strategy
is to build and acquire iGaming and traditional sports betting
platforms and use them to grow the esports business.
=====================
N E T H E R L A N D S
=====================
CLEAR CHANNEL: Moody's Rates Sr. Secured 1st Lien Term Loans 'B3'
-----------------------------------------------------------------
Moody's Ratings assigned a B3 rating to Clear Channel International
B.V.'s (CCIBV) proposed $300 million senior secured first lien term
loan and $75 million senior secured first lien term loan both due
April 2027. CCIBV's parent Clear Channel Outdoor Holdings, Inc.'s
(Clear Channel) Caa1 Corporate Family Rating, Caa1-PD Probability
of Default Rating, B2 rating on the existing senior secured bank
credit facilities and senior secured notes, and Caa3 rating on the
existing senior unsecured notes are unchanged. The outlook is
stable.
The net proceeds of the proposed Term Loans will be used to repay
the senior secured international notes due in August 2025. The
proposed Term Loans are expected to extend the maturity by one and
a half years, have a higher interest yield, but otherwise have the
same collateral package and terms as the current international
notes. There is expected to be a carveout for future asset sale
proceeds to be used towards debt reduction on the term loans. The
transaction is expected to be leverage neutral and further improve
the company's debt maturity profile.
RATINGS RATIONALE
Clear Channel's Caa1 CFR reflects stubbornly high leverage (11.5x
as of FY'23, as reported), high debt levels, and negative free cash
flows. Moody's expects leverage will improve modestly going forward
but remain very high. Moody's believes that the company may have an
opportunity to reduce indebtedness if it continues to sell its
lower performing international business segments, but such sales
are unlikely to materially reduce the company's high leverage.
Moody's expects that any proceeds from international sales will be
used to repay the proposed term loans. Although the pending
refinancing improves the near-term maturity profile, there is a
risk that the capital structure is unsustainable over the medium
term given the very high leverage.
Clear Channel benefits from its market position as one of the
largest outdoor advertising companies in the world with diversified
operations. The company depends upon the global economy and outdoor
advertising spending as a percentage of overall ad budgets, and
particularly for transit advertising demand given changes in urban
work patterns and remote working. The ability to convert
traditional static billboards to digital provides growth
opportunities which Moody's expects will lead to higher revenue and
EBITDA with appeal to a broader range of advertisers. However,
conversion requires capital, and those capital expenditures
currently make the difference between positive and negative cash
flows for the company given the high interest burden. Moody's
believes that outdoor advertising is resilient as it is not likely
to suffer from disintermediation as other traditional media outlets
have experienced and will benefit from restrictions of the supply
of additional billboards (particularly in the US), which helps
support advertising rates and high asset valuations.
The Speculative Grade Liquidity (SGL) rating of SGL-3 reflects
Moody's expectation that Clear Channel will maintain adequate
liquidity. Cash on the balance sheet was $252 million as of
December 31, 2023, while the $150 million revolving credit facility
had $43.2 million in letters of credit (L/C) outstanding, resulting
in $106.8 million of availability as of FYE'23. The $175.0 million
receivables-based credit facility had $47.6 million of letters of
credit outstanding. The receivables facility availability varies
depending on the asset base available to borrow against. Based upon
the eligible accounts receivable of the borrower and the subsidiary
borrowers and after considering the letters of credit outstanding,
the available eligible balance as of December 31, 2023 was $127.4
million. The sale of some of the company's international assets in
2024 could help to partially offset negative cash flows going
forward as interest costs and capex would likely decline
moderately. Free Cash Flow (FCF) was negative $114 million in
FYE'23.
The revolver is subject to a first lien net leverage ratio of 7.1x
if the sum of revolver draws and letters of credit exceed $10
million. If the total leverage ratio is equal to or less than 6.5x,
the revolver will only be subject to the first lien net leverage
ratio when greater than 35% is drawn. As of Fy'23, Clear Channel
was in compliance as their First Lien Leverage Ratio was 5.5x.
Moody's projects Clear Channel will remain in compliance with first
lien net leverage ratio over the next twelve months.
The stable outlook reflects Moody's expectation that the current
leverage of 11.5x will decrease to the mid to high 10x.
Deleveraging will be more than likely be attributed to EBITDA
growth rather than debt reduction. Looking at the near-term,
political advertising spend should increase in 2024, but the
company will need to experience recovery and strength in other ad
categories, such as Media (Movies and TV) and Technology. Moody's
expects Clear Channel will have adequate liquidity, despite
negative flow persisting in fiscal year 2024, with ample access to
external funding, through their Revolving Credit Facility and
Accounts Receivables Facility.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
A ratings upgrade is not expected in the near term for Clear
Channel given the very high leverage levels. However, an upgrade
could occur if leverage decreased below 7.5x with a positive free
cash flow to debt ratio in the mid-single digits and an EBITDA
minus capex to interest coverage ratio of at least 1.5x. An
adequate liquidity profile with a sufficient cushion of compliance
with financial covenants would also be required.
The ratings could be downgraded further if Moody's assessment of
the probability of default increases or recovery in a default
scenario declines.
Clear Channel Outdoor Holdings, Inc. (CCO), with its headquarters
in San Antonio, Texas, is a leading global outdoor advertising
company focused in North America and Europe that generated revenue
of about $2.1 billion as of FYE'23.
The principal methodology used in these ratings was Media published
in June 2021.
=============
R O M A N I A
=============
DIGI COMMUNICATIONS: S&P Alters Outlook to Neg., Affirms 'BB-' ICR
------------------------------------------------------------------
S&P Global Ratings revised its outlook on DIGI Communications N.V.
(Digi) to negative from stable and on its subsidiary RCS &RDS and
affirmed its 'BB-' long-term issuer credit rating on the same
entities.
The negative outlook reflects that S&P could downgrade Digi in the
next six months if the company does not take appropriate steps to
refinance its upcoming debt maturities and improve its liquidity
position such that sources of liquidity cover uses by 1.2x.
DIGI has not yet refinanced its EUR450 million bond maturing in
February 2025. S&P believes that Digi is able and willing to repay
its upcoming debt maturities but as it now estimates that its
sources of cash will only just cover its estimated uses over the
coming 12 months, S&P has revised downward its liquidity assessment
to less than adequate from adequate.
S&P said, "We have revised our liquidity assessment to less than
adequate from adequate. Over the coming 12 months, we expect Digi's
liquidity sources of cash will only just cover its sources of cash,
compared with above 1.2x previously. To manage the upcoming
maturities--in particular the EUR450 million bond maturing in
February 2025--and to regain sufficient liquidity headroom for an
adequate assessment without having to cut its capital expenditure
(capex), the company will need to obtain additional liquidity. That
said, in our view, Digi is both willing and able to repay the bond
maturity and has a variety of means to do so. We understand that
the company is currently reviewing different options, including
network assets sales, additional credit lines, or a new debt
issuance through its established position in credit markets and
sound bank relationships. We also consider that there is
flexibility in Digi's capex forecast, as at least half could be
considered discretionary growth capex (in particular growth
investments in Spain, which represent about 50% of capex, could be
reduced if needed)."
Digi has solid growth prospects, underpinned by its strong momentum
in Spain, further supported by recent remedies from the European
competition authorities. The company's market share in Spain is
still small, at about 8% in both mobile and fixed-line telephony at
year-end 2023. However, it has expanded gradually (from below 1% in
2018) and S&P believes it has solid potential for continued revenue
expansion of about 20% in 2024 and double-digit growth thereafter
and further market share gains in coming years. During 2023, Digi
expanded its customer base in the Spanish fixed market
significantly, with a 63% increase in revenue generating units
(RGUs), driven by rapid investments in its fixed network, which at
the end of 2023 reached more than 8.7 million households. In
addition, in the Spanish mobile segment--where Digi operates as a
mobile virtual network operator (MVNO) on Telefonica's network--the
company saw a 23% expansion in its mobile user base, reaching 4.7
million at year end-2023.
At the launch of mobile services in Spain, Digi focused on prepaid
customers, but since 2018, it has gradually broadened its customer
base to target the convergent and postpaid segments. As a result,
revenue from Spain increased 28% to EUR642 million in 2023,
spurring overall revenue growth of 14.3%. The recent remedy package
imposed by the European competition authorities--following the
proposed joint venture (JV) between Orange and Masmovil--resulted
in Masmovil divesting Spectrum to Digi and Digi being offered an
optional national roaming agreement with the JV. That said, Digi
competes with much larger players, including Telefonica, which at
year-end 2022 had 34% market share in fixed and 32.5% in mobile,
the new JV (44% in fixed and 48.5% in mobile), and Vodafone (16% in
fixed and 23% in mobile) at year end 2022.
Continued dominant fixed market position in Romania supports
further growth but Digi faces intense competition on the mobile
side. Digi is the clear market leader in the Romanian fixed market,
with a share of 70% as of June 30, 2023. Digi offers fast internet
speeds of between 500 megabits per second and 1 gigabit per second
(gbps; 10 gbps starting in 2022), providing a competitive edge.
However, in mobile it faces strong competition, but has managed to
increase its market share to 23% by June 2023 from 15% in 2020,
though still lagging market leaders Orange (34%) and Vodafone
(29%). Although the mobile network is mainly based on 4G
technology, the company also has a 5G presence in big cities and is
continually expanding its 5G network coverage. S&P expects that
Romania will offer continued growth of about 3%, from continued RGU
expansion.
Capex will stay elevated as Digi strengthens its state-of-the-art
network in both existing and newer markets. S&P said, "In our view,
Digi will post capex to sales of about 33%-35% in 2024-2025,
compared with 38.5% annually in 2022-2023. We expect about half of
capex will be used in Spain toward building out the fixed network.
The second biggest capex item is densification of the mobile
network in Romania, as part of the company's strategy to increase
its 5G coverage. Given the buildout of the fixed network in Romania
has reached maturity--with Digi now a market leader with a 70%
share--investments will be instead distributed to new markets,
Portugal and Belgium, where the company plans to launch mobile and
fixed services in coming quarters. We expect Italy, where Digi
operates as an MNVO focusing on the prepaid segment, to remain a
small market for the company, with revenue of about EUR30 million
in 2023, but with no capex."
S&P said, "Despite its high growth pace, we expect Digi to keep
debt to EBITDA contained below 3.5x, while the reduction of
leverage from the sale of the Hungarian business will be somewhat
offset by negative FOCF in the coming years. In line with the
company's financial policy, we expect that dividends will remain
very small, and that Digi will maintain debt to EBITDA between
3.0x-3.5x on an S&P Global Ratings-adjusted basis. We expect
leverage will peak at 3.5x in 2024. This is because i) although
improving, profitability in expanding Spanish operations is
dilutive for the group in the near term; and ii) because net debt
is expected to increase to fund the negative FOCF stemming from
high investments. We expect the adjusted free cash flow at about
breakeven in 2025 as a result of stronger cash flows from
operations both in Romania and Spain, and slowing capex as the 5G
roll-out in Romania is completed.
"The negative outlook reflects that we could downgrade Digi in the
next six months if the company does not take appropriate steps to
refinance its upcoming debt maturities and improve its liquidity
position such that sources cover uses by 1.2x.
"We could lower the rating if the company does not take appropriate
steps to refinance its upcoming debt maturities and improve its
liquidity position over the coming six months.
"Although unlikely, we could also lower the rating if debt to
EBITDA remains above 3.5x or funds from operations (FFO) to debt at
or below 20%, while FOCF remains persistently negative. This would
come from revenue and EBITDA increasing less than expected due to a
more challenging macroeconomic environment, or because of
heightened competition, leading to lower subscriber additions and
price pressure.
"We could revise the outlook to stable if the company addressed the
liquidity position so that sources cover uses by at least 1.2x. We
think that the company could do so either by raising new debt or
through asset sales."
=========
S P A I N
=========
AUTOVIA DE LA MANCHA: Moody's Affirms 'Ba2' Sr. Secured Debt Rating
-------------------------------------------------------------------
Moody's Ratings has affirmed the Ba2 underlying rating on the
EUR110 million guaranteed senior secured bank credit facility ("the
Facility") raised by Autovia de la Mancha S.A. ("Aumancha"), a
Spanish shadow toll-road operator and special purpose company. The
outlook on Aumancha has been changed to positive from stable.
The rating action follows Moody's decision on March 15, 2024 to
change the outlook on the Government of Spain to positive from
stable, while at the same time affirming its long-term issuer and
senior unsecured ratings at Baa1. It also reflects the subsequent
change of outlook to positive from stable on Junta de Comunidades
de Castilla-La Mancha's (Castilla-La Mancha, Ba1 positive) on March
21, 2024, from which Aumancha receives toll-road related payments.
The backed rating on the facility, considering the benefit of a
guarantee of scheduled payments of principal and interest provided
by Assured Guaranty UK Limited (A1 stable), is unaffected by this
rating action at A1.
RATINGS RATIONALE
Affirmation of the rating reflects robust operating performance by
Aumancha and continued timely receipt of payments from the
off-taker, the region of Castilla-La Mancha. The change in outlook
to positive reflects that the rating is currently constrained by
that of the off-taker and the change in outlook for the region.
Aumancha is a shadow toll road which relies on payments from the
region of Castilla-La Mancha. Since 2012, Castilla-La Mancha's
payments have been supported by two central government liquidity
mechanisms, the Fondo para la Financiacion de los Pagos a
Proveedores (FPPP) and the Fondo de Liquidez Autonomico (FLA).
Moody's expects that Castilla-La Mancha will continue to make
timely payments to Aumancha, as it has over the last twelve years,
and that the region will continue to receive liquidity support as
necessary from the Government of Spain.
Aumancha has demonstrated strong traffic performance over the past
2 years with volumes outperforming 2019 pre-pandemic levels.
Specifically, traffic strongly rebounded in 2021 and reached the
highest traffic band under the concession agreement for both light
and heavy vehicles in 2022 and 2023.
The minimum and average DSCRs under the Moody's case, which assumes
long-term traffic growth at around 1.7% per annum, are 1.63x and
1.72x, respectively.
The Ba2 rating on the underlying facility remains constrained by
(1) the credit quality of Castilla-La Mancha as payer under the
concession agreement; (2) Aumancha's high leverage; and (3) general
exposure to traffic risk and low inflation.
The high leverage and the exposure to traffic risk are mitigated by
the robust traffic profile, Aumancha's satisfactory debt service
coverage ratios (DSCRs) even during the pandemic, and strong
liquidity which would allow the project to withstand possible
revenue shortfalls.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
Upward rating pressure may arise if (1) the rating of Castilla-La
Mancha were upgraded; and (2) Aumancha's traffic revenues and
financial metrics remained at least in line with Moody's Base
Case.
Conversely, downward ratings pressure may arise if (1) forecast
traffic growth and/or forecast inflation were to be significantly
revised downwards relative to Moody's Base Case, leading to a
deterioration in shadow toll revenues; (2) operating, maintenance
and lifecycle cost assumptions were to prove inadequate; or (3) the
rating of Castilla-La Mancha was downgraded.
The principal methodology used in this rating was Privately Managed
Toll Roads published in December 2022.
In June 2003, Aumancha entered into a 30-year concession agreement
with Castilla-La Mancha, Junta de Comunidades de to build, operate
and maintain a 52.3 km shadow toll road, the Toledo to Consuegra
section of the Autovia de los Vinedos motorway, linking the cities
of Toledo and Tomelloso in central Spain.
LORCA HOLDCO: Fitch Hikes LongTerm IDR to 'BB', Outlook Positive
----------------------------------------------------------------
Fitch Ratings has upgraded Lorca Holdco Limited's Long-Term Issuer
Default Rating (IDR) to 'BB' from 'B+'. The Outlook is Positive.
Fitch has also upgraded Lorca's and its instrument entities' senior
secured debt to 'BB+' from 'BB' and Kaixo Bondco Telecom S.A.U.'s
senior unsecured debt to 'BB' from 'B-'. The Recovery Rating for
the senior secured debt remains at 'RR2' while the Recovery Rating
for senior unsecured debt has been revised to 'RR4' from 'RR6'.
The upgrade follows the EU commission's and the Spanish regulator's
and government's approval of the merger between MasMovil (MM),
owned by Lorca, and Orange Spain (ORA SP). The upgrade reflects a
near term completion of the merger, which results in a much
stronger operating profile, an improved capital structure and a
more conservative financial policy. The merger has a strong
strategic rationale and creates an entity with more than 2x revenue
and EBITDA compared with a pre-merger Lorca and should result in
significant synergies over the next three to four years.
The Positive Outlook reflects the combined entity's strong
deleveraging capacity and its expectation that leverage will
decrease to below its upgrade sensitivity by end-2026.
KEY RATING DRIVERS
Strong Operating Profile: The merger of ORA SP and MM, the second-
and fourth-largest network operators in Spain, respectively,
creates a market leader by access (with above a 40% consolidated
market share both in fixed broadband and mobile) and a strong
number two by revenue. The merged entity's technology position will
benefit significantly from the scope of ORA SP's developed network
infrastructure. The stronger operating profile results in looser
leverage sensitivities for the merged entity for any given rating
compared with those before the merger.
Deliverable Cost Synergies: Management expects to achieve annual
operating expense synergies of around EUR350 million and capex
synergies of around EUR150 million from year four after closing,
versus company-defined consolidated pro-forma EBITDA of EUR2.6
billion in 2023. The synergies include savings from mobile and FTTH
networks consolidation, SG&A, subscriber acquisition and other
customer-related cost reduction, but exclude commercial synergies.
Fitch sees good visibility over the delivery and timing of
synergies, given management's guide that 64% of the targets are
mechanical and contractual in nature. Both ORA SP and MM have a
strong record in acquiring businesses and delivering synergies.
Both also have a good collaboration record with a history of
network-sharing, co-investments and cooperation via national
roaming agreements.
High Initial Leverage, Swift Deleveraging: Fitch calculates
Fitch-defined EBITDA net leverage at around 5.4x at the merger
closing (i.e. at end-1Q24), and to swiftly decline to 4.8x by
end-2024, 4.2x by end-2025, and to 3.6x by end-2026, below its
upgrade threshold of 3.8x. Deleveraging will be supported by strong
free cash flow (FCF) generation and debt amortisation. Around
EUR1.5 billion of its term loan A (TLA) is scheduled to be repaid
in 2024-2026, compared with around EUR12.5 billion total debt at
the closing of the merger.
Robust FCF Generation Capacity: Fitch expects FCF to average around
9% of revenues in 2024-2027. Strong FCF generation capacity will be
supported by good profitability, with Fitch-defined EBITDA margin
expected at around 33% in 2024, fairly low capex supported by the
combined entity's well-invested networks, and limited dividends.
Its rating case envisages FCF to gradually increase to EUR1 billion
in 2027 from around EUR300 million in 2024. This will be driven by
growth in EBITDA on the back of revenue growth and synergies,
declining capex intensity as well a gradual decrease in interest
costs.
Competitive, but Rational Market: Prior to the merger, the Spanish
market was highly competitive due to four major network operators
and a high number of virtual mobile network operators (MVNOs) and
altnets. This led to consistent market share losses for the
established operators. Fitch believes the merger will help drive
rational market competition.
The conditions of the merger include divestment of 60MHz of
spectrum in the mid-to high-band frequency ranges to Digi, MVNO,
and offer of an optional national roaming agreement to the company.
This will ensure that Digi's market position will not be threatened
by the merger and allay the regulator's anti competition concerns.
The acquired spectrum could allow DiGi to deploy a hybrid network
model in the medium term. Fitch anticipates competitive dynamics to
remain rational, but see scope for stiffer competition over time.
This is contingent on the rate and scale at which Digi expands its
network footprint and acquires additional spectrum in the lower
bands.
Commitment to Deleveraging, Exit Plan: The shareholders agreement
sets out a clear exit plan for Lorca's private equity (PE) owners.
It envisages a 24 month-lockup, deleveraging to a company-defined
EBITDA net leverage of 3.5x, in preparation for an IPO in the next
few years. The financial policy has been agreed by the parties to
enable the IPO. This results in limited dividends until the
company-defined leverage is below 3.5x, and mechanisms that allow
PE investors to exit in full and for Orange S.A. (BBB+/Stable) to
take control. The deleveraging will be also supported by a
considerable share of amortised debt in the capital structure.
DERIVATION SUMMARY
Lorca's ratings (following the merger with ORA SP) are driven by
the company's strong market positions in both fixed-line and mobile
segments, well-invested networks and spectrum leadership, good
profitability and FCF generation. Its peer group includes
single-market large telecom operators such as Royal KPN N.V.
(BBB/Stable), NOS, S.G.P.S., S.A. (BBB/Stable), BT Group plc
(BBB/Stable) and VMED O2 UK Limited (BB-/Negative).
Fitch views the merged entity's operating profile broadly in line
with its investment-grade peers', but its higher leverage
constrains rating to the current level. Although these entities are
viewed as comparable, Fitch sees some differences that affect their
debt capacity at the same rating level. These include competitive
dynamics within the markets they operate, different subscriber and
revenue market shares, the different mix of customer segments they
serve - including enterprises, wholesalers, and retailers -and the
proportion of revenue they derive from mobile and broadband
services.
Lorca's debt capacity is on a par with NOS, if compared at same
rating level, and it has slightly lower debt capacity than Royal
KPN. Royal KPN has a higher revenue market share and enjoys a more
entrenched position as the incumbent telecom provider in a market
that Fitch views as less competitive than Spain.
In comparison, BT has to contend with more intense competition, and
its FCF is constrained by high capex and large pension
contributions, which restrict its debt capacity and lead to tighter
leverage sensitivities than the merged entity. VMED O2 has higher
leverage, is exposed to stiffer competition in its primary market
like BT, and has a more aggressive financial policy than the merged
entity, which results in tighter debt sensitivities at the same
rating level.
KEY ASSUMPTIONS
- Service revenue to grow by mid-to-low single digits in 2024-2027,
with stronger growth in 2024 on price increases
- Fitch-defined EBITDA margin (after lease expenses) at about 33%
in 2024, improving to abound 37% in 2027
- Non-recurring cash flow of EUR160 million in 2024, EUR70 million
in 2025 and EUR45 million in 2026
- Negative working capital of EUR110 million in 2024 and EUR90
million per year in 2025-2027
- Cash capex at 15.5% of sales in 2024, 14% in 2025, and 13% in
2026-2027
- Dividends of EUR50 million in 2025 and increasing to EUR100
million per year in 2026-2027
RATING SENSITIVITIES
Factors That Could, Individually or Collectively, Lead to an
Upgrade:
- EBITDA net leverage below 3.8x on a consistent basis
- Cash from operations (CFO) less capex consistently at or above
8.5% of gross debt
Factors That Could, Individually or Collectively, Lead to a
Revision of Outlook to Stable:
- Inability to bring EBITDA net leverage below 3.8x by end-2026
- Slower progress with integration and synergies extraction, which
would have a material impact on planned margin and cash flow
expansion
Factors That Could, Individually or Collectively, Lead to
Downgrade:
- EBITDA net leverage above 4.5x on a consistent basis
- CFO less capex consistently at or below 6.5% of gross debt
- Failure to deliver integration and synergy benefits in line with
Fitch's rating case to the extent this has a materially detrimental
impact on planned margin and cash flow expansion
- Intensification of competitive pressures leading to deterioration
in operational performance
LIQUIDITY AND DEBT STRUCTURE
Adequate Liquidity: Fitch expects the merged company to have
adequate liquidity, supported by EUR100 million of cash and cash
equivalents post-merger, positive FCF generation expected in
2024-2027, an undrawn capex facility of EUR600 million and an
undrawn revolving credit facility (RCF) of EUR750 million for
2024-2027. Most of Lorca's existing debt matures in 2027-2029,
including its new TLA in 2027, and it has an upcoming TLB with
likely maturity in 2031.
Senior Debt Rating Approach: Fitch rates Lorca's senior secured
debt at 'BB+' and senior unsecured debt at 'BB' in accordance with
Fitch's Corporates Recovery Ratings and Instrument Ratings
Criteria, under which Fitch applies a generic approach to
instrument notching for 'BB' rated issuers. Fitch labels Lorca's
senior secured debt as "category 2 first lien" under its criteria,
thus resulting in a 'RR2', with a single-notch uplift from the IDR
to 'BB+'. Fitch labels Lorca's senior unsecured debt as "second
lien/unsecured" under its criteria, thus resulting in 'RR4'. Its
assessment for the senior unsecured debt rating at 'BB' and
Recovery Rating of 'RR4' considers the absence of structural
subordination and a significant amortising part of its senior
secured debt.
SUMMARY OF FINANCIAL ADJUSTMENTS
Cash outflow related 'subscriber acquisition costs' that are not
reported within capex are capitalised as 'costs of obtaining
contracts with customers' and released to the consolidated
statement of profit or loss during a period that ranges between 24-
to-72 month in Lorca's consolidated financial statements as defined
by the company's accounting policy. Lorca has written off EUR278
million of 'costs of obtaining contracts with customers' during the
purchase price allocation exercise performed in 2020 when MM was
taken private and in 2021 when Euskaltel was acquired and its value
was implicitly embedded in the measurement of the value of the
customer relationships.
To calculate a normalised / recurring EBITDA level Fitch has
adjusted the company's reported EBITDA by decreasing it by the
amount of 'amortisation' / release to the consolidated statement of
profit or loss as if MM and Euskaltel have always been consolidated
by Lorca.
ESG CONSIDERATIONS
The highest level of ESG credit relevance is a score of '3', unless
otherwise disclosed in this section. A score of '3' means ESG
issues are credit-neutral or have only a minimal credit impact on
the entity, either due to their nature or the way in which they are
being managed by the entity. Fitch's ESG Relevance Scores are not
inputs in the rating process; they are an observation on the
relevance and materiality of ESG factors in the rating decision.
Entity/Debt Rating Recovery Prior
----------- ------ -------- -----
Lorca Finco PLC
senior secured LT BB+ New Rating RR2
senior secured LT BB+ Upgrade RR2 BB
Lorca Holdco Limited LT IDR BB Upgrade B+
Lorca Telecom
Bondco S.A.U.
senior secured LT BB+ Upgrade RR2 BB
Kaixo Bondco
Telecom S.A.U.
senior unsecured LT BB Upgrade RR4 B-
===========
T U R K E Y
===========
TAV HAVALIMANLARI: Fitch Hikes LongTerm IDR to BB+, Outlook Stable
------------------------------------------------------------------
Fitch Ratings has upgraded TAV Havalimanlari Holding A.S.'s (TAVH)
Long-Term Issuer Default Rating (IDR) and the long-term rating on
its senior unsecured notes to 'BB+' from 'BB'. The Outlooks are
Stable.
RATING RATIONALE
The upgrades have been driven by the recent upgrade of Turkiye's
Long-Term Foreign-Currency IDR to 'B+' from 'B' and TAV group's
(TAV) stable credit profile after the publication of 2023 earnings
and 2024 outlook.
The ratings reflect TAVH's diversified portfolio of assets, its
solid financial metrics and expected support from its parent
company Aeroports de Paris S.A. (ADP; BBB+/Stable).
Fitch assesses TAVH's Standalone Credit Profile (SCP) at 'bb-',
reflecting TAV's material operating and regulatory exposure to
Turkiye as well as the structural subordination of TAVH (holdco)
debt to project-financed operating companies' (opco) debt.
TAVH's IDR and senior unsecured rating are notched up by two
notches from the SCP to factor in ADP's support, as per its
Parent-Subsidiary-Linkage Rating Criteria, which considers the low
operational and legal incentive but high strategic incentive for
ADP to provide financial support.
ADP has a stronger credit profile than its subsidiary and fully
consolidates and controls TAVH through a 46.1% stake. Fitch views
TAV as a strategic asset for ADP but the parent does not guarantee
the subsidiary's debt.
The Stable Outlook reflects that the ratings are now constrained by
TAV's consolidated leverage profile. As such, Fitch views the
rating capped but no longer constrained by country risk
considerations.
KEY RATING DRIVERS
The upgrades are driven solely by the upgrade of Turkiye's
Long-Term IDR and consequently Fitch has not performed a full
review. The key rating drivers are as follows:
Revenue Risk (Volume): 'High Midrange'
Revenue Risk (Price): 'Midrange'
Infrastructure Development and Renewal: 'Midrange'
Debt Structure: 'Weaker'
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
- Proportional consolidated leverage at TAV group consistently
above 4.5x
- Downgrade of Turkiye's sovereign rating
- Ankara and Antalya airports' guaranteed bridge loans not
refinanced well ahead of their respective maturities
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
- Proportional consolidated leverage of TAV group consistently
below 4.0x, and an upgrade of Turkiye's sovereign rating
ESG CONSIDERATIONS
The highest level of ESG credit relevance is a score of '3', unless
otherwise disclosed in this section. A score of '3' means ESG
issues are credit-neutral or have only a minimal credit impact on
the entity, either due to their nature or the way in which they are
being managed by the entity. Fitch's ESG Relevance Scores are not
inputs in the rating process; they are an observation on the
relevance and materiality of ESG factors in the rating decision.
Entity/Debt Rating Prior
----------- ------ -----
TAV Havalimanlari
Holding A.S. LT IDR BB+ Upgrade BB
TAV Havalimanlari
Holding A.S./Airport
Revenues - Senior
Unsecured Debt/1 LT LT
USD 400 mln 8.5%
bond/note 07-Dec-2028
87216EAA4 LT BB+ Upgrade BB
TURKIYE SINAI: Fitch Assigns Final 'CCC-' Rating to AT1 Notes
-------------------------------------------------------------
Fitch Ratings has assigned Turkiye Sinai Kalkinma Bankasi A.S.'
(TSKB; B-/b- all on Rating Watch Positive (RWP)) USD300 million
issue of additional Tier 1 (AT1) capital notes a final rating of
'CCC-' and placed it on RWP.
The final rating is the same as the expected rating assigned on 12
March 2024.
KEY RATING DRIVERS
The notes are Basel III-compliant perpetual, deeply subordinated,
fixed-rate resettable AT1 debt securities. The notes have fully
discretionary non-cumulative interest payments and are subject to
partial or full write-down if the group's common equity Tier 1
(CET1) ratio falls below 5.125%. The principal write-down can be
reversed and written up at full discretion of the issuer if
positive distributable net profit is recorded.
The rating assigned to the securities is three notches below TSKB's
Viability Rating (VR) of 'b-'/RWP, in accordance with Fitch's Bank
Rating Criteria. Fitch has only notched the debt rating three times
from TSKB's VR, instead of the baseline four notches, due to rating
compression, as TSKB's VR is below the 'BB-' anchor rating
threshold.
The notes have no established redemption date, although TSKB will
have an option (subject to BRSA approval) to repay the notes at the
first coupon reset date (2029) and every fifth anniversary
thereof.
TSKB's regulatory CET1 and Tier 1 ratios were 19.4% and 24.8%
(including regulatory forbearance on foreign-currency risk-weighted
assets), respectively, at end-2023, well above their regulatory
minimum requirements of 7% and 8.5%, respectively.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
As the notes are notched down from TSKB's VR, the rating is
sensitive to a downgrade of the VR. The notes' rating is also
sensitive to an unfavorable revision in Fitch's assessment of
incremental non-performance risk.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
The notes' rating is sensitive to an upgrade of TSKB's VR.
DATE OF RELEVANT COMMITTEE
12 March 2024
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
TSKB has ratings linked to the Turkish sovereign rating and
Isbank.
ESG CONSIDERATIONS
The highest level of ESG credit relevance is a score of '3', unless
otherwise disclosed in this section. A score of '3' means ESG
issues are credit-neutral or have only a minimal credit impact on
the entity, either due to their nature or the way in which they are
being managed by the entity. Fitch's ESG Relevance Scores are not
inputs in the rating process; they are an observation on the
relevance and materiality of ESG factors in the rating decision.
Entity/Debt Rating
----------- ------
Turkiye Sinai
Kalkinma Bankasi A.S.
Subordinated LT CCC- New Rating
TURKIYE SISE: Fitch Upgrades LongTerm IDR to 'B+'
-------------------------------------------------
Fitch Ratings has upgraded 8 Turkish Corporates' Long-Term
Foreign-Currency (LTFC) Issuer Default Ratings (IDRs).
The rating actions follow the upgrade of Turkiye's Long-Term
Foreign-Currency IDR on 8 March 2024 (see 'Fitch Upgrades Turkiye
to 'B+'; Outlook Positive')
The issuers' high exposure to the Turkish economy means their
Foreign-Currency IDRs are influenced by the Turkish Country
Ceiling, which has also been upgraded to 'B'+. The upgrade reflects
the likely correlation of future rating actions on some corporates
with changes to the sovereign rating, assuming that the Country
Ceiling moves in line with the sovereign IDR.
KEY RATING DRIVERS
For full key ratings drivers and ESG considerations for each
issuer, see the rating action commentaries (RACs) listed below.
Arcelik A.S. (see 'Fitch Affirms Arcelik A.S. at 'BB-'; Outlook
Negative' dated 28 April 2023)
Bosphorus Pass Through Certificates Series 2015-1A (see 'Fitch
Affirms Turk Hava Yollari Anonim Ortakligi (Turkish Airlines) at
'B+'/Stable' dated 8th February 2024).
Emlak Konut Gayrimenkul Yatirim Ortakligi A.S. (see 'Fitch Affirms
Emlak Konut at 'B'; Outlook Stable' dated 9 October 2023)
Ordu Yardimlasma Kurumu (OYAK) (see 'Fitch Affirms Ordu Yardimlasma
Kurumu (OYAK) at 'B'; Outlook Stable' dated 4 January 2024')
Turk Hava Yollari Anonim Ortakligi (Turkish Airlines) ((see 'Fitch
Affirms Turk Hava Yollari Anonim Ortakligi (Turkish Airlines) at
'B+'/Stable' dated 8th February 2024).)
Turk Telekomunikasyon A.S. (see 'Fitch Affirms Turk Telekom at 'B';
Stable Outlook' dated 7 November 2023)
Turkcell Iletisim Hizmetleri A.S (see 'Fitch Affirms Turkcell at
'B'; Stable Outlook' dated 7 November 2023)
Turkiye Sise ve Cam Fabrikalari AS (see 'Fitch Affirms Turkiye Sise
ve Cam Fabrikalari AS at 'B'; Outlook Negative' dated 30 May 2023)
Ulker Biskuvi Sanayi A.S. (see 'Fitch Affirms Ulker Biskuvi Sanayi
at 'B'; Outlook Stable' dated 12 January 2024)
DERIVATION SUMMARY
See relevant RACs for each issuer.
KEY ASSUMPTIONS
See relevant RACS for each issuer.
RECOVERY ANALYSIS
See relevant RACS for each issuer.
RATING SENSITIVITIES
Arcelik A.S.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade:
- The ratings could be upgraded if Turkiye's Country Ceiling is
upgraded
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade:
- A downgrade of Turkiye's Country Ceiling and/or weakening of
Arcelik's FC debt coverage ratios
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action on the Local-Currency (LC) IDR:
- Substantial deterioration in liquidity or consistently negative
free cash flow (FCF)
- Increased risk from Whirlpool's subsidiary acquisition leading to
high operating spending and further deterioration in EBIT margin
below 7%
- Funds from operations (FFO) margin sustained below 7%
- Receivables-adjusted FFO net leverage above 3.5x
- Weakening of The Standalone Credit Profile (SCP) due to increased
funding cost and FFO interest cover below 3x
Bosphorus Pass Through Certificates Series 2015-1A
Factors That Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade:
- An upgrade of Turkiye's Country Ceiling
Factors That Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade:
- A downgrade of Turkiye's Country Ceiling
Emlak Konut Gayrimenkul Yatirim Ortakligi A.S.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade:
- An upgrade of the Country Ceiling
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade:
- Deterioration of the operating environment and a downgrade of the
Country Ceiling
Factors that Could, Individually or Collectively, Lead to a
Negative Rating Action (on a Standalone Basis):
- Material changes in the relationship with Turkiye's Housing
Development Administration leading to a weakening in Emlak Konut's
financial profile and financial flexibility
- Net debt/EBITDA above 4.0x.
- Deterioration in the liquidity profile over a sustained period
Ordu Yardimlasma Kurumu (OYAK)
Factors That Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade:
- An upgrade of Turkiye's Country Ceiling combined with a business
and financial profile that is consistent with a 'BB' category
Factors That Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade:
- A downgrade of Turkiye's Country Ceiling
- Fitch-adjusted investment holding company cash cover below 3.3x
on a sustained basis
- Weakening in the credit quality of its portfolio leading to a
Fitch-adjusted loan-to-value sustained above 45%
- Decreased diversification of cash flow leading to increasing
dependency on a single asset
Turk Hava Yollari Anonim Ortakligi (Turkish Airlines or THY)
Factors That Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade:
- FFO adjusted gross leverage and EBITDAR leverage below 3.5x, FFO
fixed charge over 2.5x, all on a sustained basis could lead to an
upward revision of the SCP
- An upgrade of Turkiye's IDRs and Country Ceiling along with an
upward revision of THY's SCP would be positive for THY's IDRs
Factors That Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade:
- A downgrade of Turkiye's IDRs and Country Ceiling
- Tighter links with the government
- FFO gross adjusted leverage and EBITDAR leverage above 4.5x, FFO
fixed charge cover below 2.0x, all on a sustained basis
Turk Telekomunikasyon A.S. (TT)
Factors That Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade:
- Positive rating action on Turkiye would lead to a corresponding
action on TT, provided TT's SCP is at the same level or higher than
the sovereign ratings, and the links between the government and TT
remain strong
Factors That Could, Individually or Collectively, to an Upward
Revision of the SCP but Not Necessarily TT's IDR:
- Better visibility in the renewal of the concession agreement
ending in 2026 as well as decreased foreign-exchange (FX) mismatch
between TT's net debt and cash flows and/or more effective hedging
being put in place
Factors That Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade:
- EBITDA net leverage above 4.0x on a sustained basis
- Material deterioration in pre-dividend FCF margins, or in the
regulatory or operating environments
- Negative action on Turkiye's Country Ceiling or LTLC IDR could
lead to a corresponding action on TT's LTFC or LTLC IDRs,
respectively
- Sustained increase in FX mismatch between TT's net debt and cash
flows
- Excessive reliance on short-term funding, without adequate
liquidity over the next 12-18 months
Turkcell Iletisim Hizmetleri A.S (Tcell)
Factors That Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade:
- An upgrade of Turkiye's Country Ceiling, assuming no change in
Tcell's underlying credit quality
Factors That Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade:
- EBITDA net leverage above 4.0x on a sustained basis
- Material deterioration in pre-dividend FCF margins, or in the
regulatory or operating environments
- Sustained increase in FX mismatch between net debt and cash
flows
- A downgrade of Turkiye's Country Ceiling
- Excessive reliance on short-term funding, without adequate
liquidity over the next 12-18 months
Turkiye Sise ve Cam Fabrikalari AS (Sisecam)
Factors That Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade:
- An upgrade of Turkiye's Country Ceiling assuming no deterioration
in the company's credit profile
Factors That Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade:
- Significant deterioration in its business and financial profiles
Ulker Biskuvi Sanayi A.S.
Factors That Could, Individually or Collectively, Lead to a
Positive Rating Action/Upgrade:
- Upgrade of Turkiye's Country Ceiling in combination with
- EBITDA net leverage remaining below 3.5x, supported by healthy
operating performance and a consistent financial and
cash-management policy
- Stable market shares in Turkiye or internationally translating
into resilient operating margins
- Positive FCF on a consistent basis
Factors That Could, Individually or Collectively, Lead to a
Negative Rating Action/Downgrade:
- Downgrade of Turkiye's Country Ceiling to below 'B+'
- Deteriorated liquidity position with inability to repay or
refinance debt maturing in 2025 on a timely basis
- EBITDA net leverage above 4.5x due to M&A, investments in
high-risk securities or related-party transactions leading to
significant cash leakage outside Ulker's scope of consolidation
- Increased competition or consumers trading down that erode
Ulker's share in key markets and leading to deteriorating operating
margins
- Negative FCF on a consistent basis
For the sovereign rating of Turkiye, Fitch outlined the following
sensitivities in its rating action commentary of 8 March 2024:
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade:
- Macro: Failure to maintain a policy mix consistent with reducing
risks to macroeconomic and financial stability, including through a
significant decline in inflation
- External Finances: Failure to improve the level and composition
of international reserves, for example, as a result of reduced
market confidence in the commitment to consistent macroeconomic
policies
- Structural Features: Deterioration of the domestic political or
security environment or international relations that affects the
economy and external finances
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade:
- Macro: Evidence of sustained progress in Turkiye's disinflation
and greater confidence that the current policy normalisation and
rebalancing process will lead to a sustained decline in inflation
- External Finances: Sustained strengthening in external buffers,
for example, due to increased capital inflows, in turn leading to
improvements in the level and composition of international reserves
and reduced dollarisation
LIQUIDITY AND DEBT STRUCTURE
See relevant RACs for each issuer.
ISSUER PROFILE
See relevant RACs for each issuer.
SUMMARY OF FINANCIAL ADJUSTMENTS
See relevant RACs for each issuer.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
See relevant RACs for each issuer.
ESG CONSIDERATIONS
Ulker has an ESG Relevance Score of '4' for Group Structure due to
the complexity of the structure of the wider Yildiz group and
material related-party transactions. This has a negative impact on
the credit profile, and is relevant to the rating in conjunction
with other factors.
The highest level of ESG credit relevance is a score of '3', unless
otherwise disclosed in this section. A score of '3' means ESG
issues are credit-neutral or have only a minimal credit impact on
the entity, either due to their nature or the way in which they are
being managed by the entity. Fitch's ESG Relevance Scores are not
inputs in the rating process; they are an observation on the
relevance and materiality of ESG factors in the rating decision.
Entity/Debt Rating Recovery Prior
----------- ------ -------- -----
Emlak Konut
Gayrimenkul Yatirim
Ortakligi A.S. LT IDR B+ Upgrade B
LC LT IDR B+ Upgrade B
Turk Telekomunikasyon
A.S. LT IDR B+ Upgrade B
LC LT IDR B+ Upgrade B
senior unsecured LT B+ Upgrade RR4 B
Turkiye Sise ve
Cam Fabrikalari AS LT IDR B+ Upgrade B
senior unsecured LT B+ Upgrade RR4 B
Turkcell Iletisim
Hizmetleri A.S LT IDR B+ Upgrade B
senior unsecured LT B+ Upgrade RR4 B
Ulker Biskuvi
Sanayi A.S. LT IDR B+ Upgrade B
senior unsecured LT B+ Upgrade RR4 B
Arcelik A.S. LT IDR BB Upgrade BB-
senior unsecured LT BB Upgrade RR4 BB-
Ordu Yardimlasma
Kurumu (Oyak) LT IDR B+ Upgrade B
Turk Hava Yollari
Anonim Ortakligi
(Turkish Airlines) LT IDR BB- Upgrade B+
LC LT IDR BB- Upgrade B+
Bosphorus Pass
Through Certificates
Series 2015-1A
senior secured LT BB Upgrade BB-
===========================
U N I T E D K I N G D O M
===========================
ARDONAGH GROUP: S&P Assigns 'B-' ICR, Outlook Stable
----------------------------------------------------
S&P Global Ratings assigned its 'B-' long-term issuer credit rating
to U.K.-based insurance broker Ardonagh Group Ltd. (AGHL) and its
financing subsidiaries, including Ardonagh Finco Ltd. and Ardonagh
Group Finance Ltd. S&P also assigned its 'B-' issue ratings and '3'
recovery ratings to the company's $750 million senior secured notes
and EUR500 million senior secured notes; and its 'CCC' issue rating
and '6' recovery rating to the $1 billion senior unsecured notes.
The stable outlook reflects S&P's expectation of an improvement in
Ardonagh's adjusted credit metrics, including EBITDA margins and
FOCF, from 2025.
AGHL has completed refinancing its debt structure.
The company raised its GBP2.3 billion equivalent of seven-year
senior secured facilities (split into US$1.9 billion, EUR800
million, and A$200 million tranches), GBP1 billion equivalent of
seven-year senior secured notes (split into EUR500 million and $750
million tranches) and GBP800 million equivalent ($1 billion) of
eight-year senior unsecured notes. The company upsized and extended
its existing GBP192 million super senior revolving credit facility
to GBP300 million maturing in 2029.
AGHL has completed its refinancing in line with S&P's expectations.
The company refinanced its existing capital structure with the
issuance of $750 million in seven-year senior secured notes, EUR500
million in seven-year senior secured notes, and $1 billion in
eight-year senior unsecured notes; and refinanced its senior
secured facilities and the RCF.
The ratings are in line with S&P's expectations for the preliminary
rating.
The stable outlook reflects S&P's expectation that the group will
deleverage and start generating positive FOCF from 2025, despite
its high interest burden and costs associated with integrating
recent acquisitions.
S&P could take a negative rating action if:
-- Weaker trading performance or ongoing exceptional costs led us
to expect materially lower or negative ongoing FOCF;
-- The company takes on highly aggressive debt-funded acquisitions
or dividends that increase leverage and reduce cash flow; or
-- Weak cash generation and tightened liquidity led S&P to
consider the group's capital structure unsustainable.
Although S&P believes it unlikely in the near term, it could take a
positive rating action if the group outperformed our forecasts,
resulting in material deleveraging and improved cash flow with
funds from operations cash interest coverage of more than 2.0x.
BILLING AQUADROME: Bought Out of Administration by Meadow Bay
-------------------------------------------------------------
Harriet Heywood at BBC News reports that the future of a mobile
home park which was put into administration has been secured.
According to BBC, Billing Aquadrome, in Northampton, has been sold
to Meadow Bay Villages, along with Cogenhoe Mill holiday park.
Meadow Bay Villages is a newly formed resort operator which has
also purchased the Golden Leas and Hollybush Farm holiday parks on
the Isle of Sheppey, Kent, and Hayling Island Holiday Park in
Hampshire.
"We are already thinking about exciting plans for further
investment and development at these already great locations," BBC
quotes Chief executive officer Geoffrey Smith as saying.
The Joint administrators said that the sale "secures the future of
the park".
FLAT CAP: Two Hotels Enter New Management Contracts
---------------------------------------------------
Jungmin Seo at The Caterer reports that Two Flat Cap Hotels
properties that had been put on the market for GBP7 million have
entered new management contracts with Condor Hotels.
Cheshire-based Flat Cap Hotels, which was founded by brothers and
third-generation hoteliers Oliver and Dominic Heywood in 2015, fell
into administration earlier this year, The Caterer relates.
Its portfolio consisted of the Bridge in Prestbury, which won a
Hotel Catey in 2021, the Vicarage in Cranage and the Courthouse in
Knutsford, which was the only property to close.
According to The Caterer, with the support of joint administrators
Gareth Prince, Julian Pitt and Mark Malone of Begbies Traynor and
hospitality management company Condor Hotels, the Bridge and the
Vicarage have been able to preserve their front of house team
"until a suitable sale is made".
General manager Paul Wadsworth will lead both Grade II-listed
properties through the transition period with a "business as usual"
approach, The Caterer states.
He will also be supported by Laura Fuller at the Bridge and Jemma
Marshall at the Vicarage, The Caterer notes.
Christie & Co has been appointed to market the Bridge in Prestbury
for offers in excess of GBP4.5 million and the Vicarage in Cranage
for offers in excess of GBP2.5 million, The Caterer recounts.
LUNAZ GROUP: Enters Administration, Halts Operations
----------------------------------------------------
Business Sale reports that Lunaz Group Limited, a vehicle
electrification and upcycling business, has been placed into
administration.
FRP Advisory partners Sarah Cook and Miles Needham were appointed
as joint administrators of the company on March 20, Business Sale
relates.
The firm is the parent company of Lunaz Limited and App Tech
Productions, which fell into administration on March 20 and March
14, respectively. The group, which was founded in 2018,
specialised in electrified and upcycled classic cars and commercial
vehicles, including refuse lorries.
According to Business Sale, despite a strong, forward-looking
offering, administrators say that the business suffered as a result
of falling sales in the wake of the government's recent decision to
extend the deadline for the transition to zero-emission vehicles.
The majority of roles across the group have been made redundant and
operations have ceased at the company's Northamptonshire
facilities, Business Sale states. The administrators are now
seeking to realise the remaining assets of the group's two sites at
Silverstone Technology Park, Business Sale notes.
In Lunaz Group Limited's most recent accounts at Companies House,
for the year ending October 31, 2022, its total assets were valued
at close to GBP18.3 million, with total equity standing at just
under GBP17 million, Business Sale discloses.
MUJI: European Unit Set to Go Into Administration
-------------------------------------------------
The Guardian reports that the European arm of the Japanese clothing
and homeware retailer Muji is to appoint administrators, in another
gloomy signal for the UK's struggling high street.
According to The Guardian, the spokesperson for the retailer, which
has six stores in London and one in Birmingham, said the move
formed part of a "planned strategic restructuring of the business",
and that it expected to reach a deal shortly.
The spokesperson for the retailer, which has six stores in London
and one in Birmingham, said the move formed part of a "planned
strategic restructuring of the business", and that it expected to
reach a deal shortly, The Guardian relates.
The company stressed the process would have no immediate impact on
shops, staff and the general running of the chain, The Guardian
notes.
"For Muji's colleagues and customers in Europe it is business as
usual. All stores and e-commerce will continue to operate as
before, and all new and outstanding orders will be fulfilled," The
Guardian quotes the company as saying.
Muji was launched in Japan in 1980. It sells a range including
clothes, stationery, homeware, beauty products and cupboard
essentials.
It is known for its focus on Japanese-inspired, simple and
functional goods and has stores across Europe. Its remit has
stretched to prefab houses and driverless shuttle buses.
REDCAT PUB: Enters Administration, Five Sites Shut Down
-------------------------------------------------------
Adam Mawardi at The Telegraph reports that a pub chain founded by
the former boss of Greene King has called in administrators as the
hospitality industry reels from the cost-of-living crisis and a
soaring minimum wage bill.
RedCat Pub Company said it has hired Interpath Advisory to put part
of its business into administration as it seeks to dispose of
underperforming sites, The Telegraph relates. It is also exploring
the sale of a further 14 sites, The Telegraph discloses.
The company, which was founded in 2021 by the former Greene King
chief executive Rooney Anand, has expanded rapidly since by buying
sites from rivals such as Slug & Lettuce owner Stonegate, The
Telegraph notes. It now has around 100 pubs and pub hotels, with
1,400 bedrooms, according to The Telegraph.
Its expansion has been fuelled by backing from Oaktree Capital, a
California-based asset manager run by billionaire investor Howard
Marks, which manages US$172 billion (GBP136.1 billion) of assets,
The Telegraph states.
However, RedCat has since suffered as the hospitality sector
grapples with the cost-of-living crisis, high energy prices and
inflationary pressures, The Telegraph discloses.
According to The Telegraph, Interpath said on March 28 that RedCat
Leased Pubs (RCLP), a division of the company which owns 10 sites,
has gone into administration, leading to the closure of five sites.
The subsidiary does not have any employees, RedCat said.
"RCLP comprises a group of pub sites in prominent locations,
predominantly in London and the South East. Financial challenges
have weighed heavily on the company in recent years which rendered
it unable to continue in its current form," The Telegraph quotes
Nick Holloway, joint administrator, as saying. "The administration
now provides a period in which we can undertake a marketing process
to explore a sale of business and assets of the pubs, either
individually or as a group. We expect interest from across the
industry. Regrettably, the financial position of the business
means that five sites have now closed."
Pre-tax losses at RedCat Leased Pubs ballooned from GBP1.5 million
in 2022 to GBP6.6 million last year, its latest accounts show, The
Telegraph relays. It had GBP9.4 million of short-term debt as of
April 2023, The Telegraph states.
THAMES WATER: Owners Refuse to Provide GBP500MM Cash Injection
--------------------------------------------------------------
Matt Oliver at The Telegraph reports that the owners of Thames
Water have refused to provide a GBP500 million cash injection to
prevent its collapse as they renew demands for household bills to
increase by 40%.
According to The Telegraph, a consortium of pension funds and
foreign states on March 28 announced they would stop funding the
company and accused Ofwat, the regulator, of rendering it
"uninvestable".
They previously committed to providing GBP500 million to the
company before the end of this month, as part of an overall GBP3.75
billionn funding package through to 2030, The Telegraph notes.
But their move stoked fears that Thames, which supplies a quarter
of UK homes, may now have to be renationalised at a potential GBP5
billion cost to taxpayers, The Telegraph states.
Jeremy Hunt, the Chancellor, said the Treasury was monitoring the
situation closely but insisted the company was "still solvent",
while Thames executives stressed there was no threat to water
supplies, The Telegraph relates.
The crisis has erupted as Ofwat is considering the company's
business plan for 2025 to 2030, including a controversial proposal
to raise bills by an average of almost GBP200 per household, The
Telegraph recounts.
Thames says the increase is essential to cover its operational
costs, pay for infrastructure upgrades to reduce storm overflows
and generate sufficient returns for its investors, according to The
Telegraph.
The company, which has an GBP18 billion debt mountain and is one of
the country's most complained-about suppliers, is also demanding
the freedom to pay investor dividends again and wants Ofwat to
reduce the fines it pays for sewage spills, The Telegraph relays.
But on March 28 it emerged talks with the regulator had broken
down, with Thames and its investors saying Ofwat was pushing back
against its demand for higher bills, The Telegraph discloses.
The regulator is understood to be "sticking to its guns" and has
told the company that consumers should not foot the bill for the
company's "financial engineering", The Telegraph notes.
It leaves the company and the watchdog locked in a standoff, with
Ofwat expected to issue a draft decision on Thames's plans at the
end of May, The Telegraph states.
According to The Telegraph, without further funding from investors,
bosses said Thames Water's operating company had enough cash or
borrowing facilities to survive until around May 2025 but would
need to raise further debt or equity to avoid collapse.
However, Chris Weston, Thames Water's chief executive, claimed it
remained "business as usual" and rejected suggestions the company
was on the verge of failing, The Telegraph notes.
He said: "There's still a lot of water to go under the bridge."
He would not reveal what the specific disagreements were with Ofwat
but suggested that the regulator's requirements would yield returns
"considerably lower" than what investors were willing to accept.
The row is thought to centre on a refusal by the regulator to
countenance a 40% rise in bills proposed by Thames, The Telegraph
states. That would see the amount paid per household rise from an
average of GBP436 per year to GBP609, The Telegraph notes.
According to The Telegraph, if the company fails, the Government
has said it would be placed into "special administration", a
process that was used when the energy supplier Bulb collapsed in
2021.
Ministers have said they will not interfere in the talks, pointing
out that Ofwat is independent, The Telegraph notes.
But a source close to Steve Barclay, the Environment Secretary,
added: "We certainly don't think customers would think it is
acceptable for there to be an easing of the regulatory regime
because of this company's demands."
Thames Water's nine investors include the Universities
Superannuation Scheme, the Canadian teachers' pension fund Omers,
infrastructure investor Hermes and sovereign wealth funds linked to
China and Abu Dhabi, among others.
According to The Telegraph, on March 28, in a joint statement, they
all said: "After more than a year of negotiations with the
regulator, Ofwat has not been prepared to provide the necessary
regulatory support for a business plan which ultimately addresses
the issues that Thames Water faces.
"As a result, shareholders are not in a position to provide further
funding to Thames Water.
"Shareholders will work constructively with Thames Water, Ofwat and
Government on how to address the consequences of Ofwat's
decision."
VANQUIS BANKING: Fitch Affirms 'BB' LongTerm IDR, Outlook Now Neg.
------------------------------------------------------------------
Fitch Ratings has revised the Outlook on UK-domiciled Vanquis
Banking Group plc's (VBG) Long-Term Issuer Default Rating (IDR) to
Negative from Stable and affirmed the IDR at 'BB'. Fitch has also
affirmed VBG's senior unsecured long-term debt rating at 'BB' and
its Tier 2 notes at 'B+'.
The Negative Outlook reflects Fitch's expectation of a slower and
less certain recovery in Vanquis's earnings from recent low levels
than was previously factored into its Long-Term IDR, which in turn
impacts perceptions of the strength of its franchise and business
model. This follows VBG's announcement on 11 March 2024 of a
near-term increase in the operational costs of addressing customer
complaints and a likely shortfall against market consensus of
income expectations for 2024, followed by still subdued returns in
2025.
KEY RATING DRIVERS
VBG's ratings reflect its acceptable capital buffers over the
regulatory capital requirement, beneficial funding access via its
ability to use Vanquis Bank deposits for other business units, and
its well-established but narrow franchise in consumer and auto
lending in the UK. The ratings also reflect Fitch's view that VBG's
business model is concentrated by income sources and geography and
reliant on non-prime lending, which results in weaker asset quality
and historically volatile profitability.
On 11 March, VBG announced that it expected its income for 2024 to
be materially lower than the prevailing market consensus. This
increases doubt over VBG's capacity to rebuild the scale of
earnings commensurate with medium-term maintenance of the current
rating, notwithstanding VBG's previously announced cost-savings
commitments.
VBG also disclosed on 11 March that it was experiencing significant
levels of third-party complaint submissions, requiring increased
administration costs to enable the group to address them in a
timely manner. Fitch notes that the majority of complaints were
described as not upheld, but in the agency's view, prolonged
exposure to such costs would increase concern about the longer-term
challenges in delivering sustained and stable profitability from
VBG's segment of the lending market, and potentially in turn to its
present level of funding flexibility.
For further detail of VBG's key rating drivers, see Fitch Affirms
Vanquis Banking Group at 'BB'; Outlook Stable, published on 14
February 2024.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
Inability over the Outlook horizon to demonstrate clear progress
towards achieving a consistent long-term ratio of pre-tax profit to
average total assets of at least 2.5%, which would weaken Fitch's
view of the strength of VBG's franchise and business model
VBG's common equity Tier 1 ratio falling below 16% on a sustained
basis or a reduction in regulatory capital headroom to below GBP50
million (for example as a result of negative earnings), or an
erosion of market confidence in the adequacy of VBG's capital in
the light of emerging risks
A deterioration in VBG's liquidity profile, as reflected in a
reduction in unrestricted liquidity or notably weaker funding
access
Incurrence of a material level of fine or need to pay redress to
customers in respect of any significant demonstrated breach of
regulatory lending guidelines
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
Fitch could revise VBG's Outlook to Stable if earnings recover more
quickly than now projected and the financial and reputational
impacts of customer complaints are contained without significant
damage to Vanquis's operating profitability or liquidity metrics
Upside for the ratings is presently limited, in view of the
Negative Outlook. In the medium term it would require gaining
material scale and revenue diversification by business line,
accompanied by a strong and sustainable rebound in operational
profitability
DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS
VBG's senior unsecured notes are rated in line with the group's
Long-Term IDR, reflecting Fitch's expectation of average recovery
prospects.
The Tier 2 notes' rating is two notches below VBG's Long-Term IDR,
reflecting poor recovery prospects in the event of a failure of
VBG, in line with Fitch's base-case notching for Tier 2 debt. Fitch
has not applied additional notching as the issue terms do not
contain features that give rise to incremental non-performance
risk.
DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES
The senior unsecured debt and Tier 2 notes ratings are principally
sensitive to a change in VBG's Long-Term IDR and material changes
to Fitch's recovery expectations for the bonds.
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade:
The group's senior debt could be downgraded if the layer of senior
group debt plus junior debt plus excess capital (outside the bank)
decreases to less than 10% of risk-weighted assets relative to
structurally preferred retail deposit funding.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade:
An upgrade of VBG's Long-Term IDR would result in an upgrade of the
unsecured debt and Tier 2 notes' ratings.
ADJUSTMENTS
The sector risk operating environment score has been assigned above
the implied score due to the following adjustment reason(s):
regulatory and legal framework (positive).
The business profile score has been assigned below the implied
score due to the following adjustment reason(s): business model
(negative).
The asset quality score has been assigned above the implied score
due to the following adjustment reason(s): collateral and reserves
(positive).
The Earnings & Profitability score has been assigned below the
implied score due to the following adjustment reason(s): Historical
and future metrics (negative).
Fitch has used the Bank Rating Criteria for the following
adjustment:
The capitalisation and leverage score has been assigned below the
implied score due to the following adjustment reason(s): size of
capital base (negative), risk profile and business model
(negative).
ESG CONSIDERATIONS
VBG has an ESG Relevance Score of '4' for Exposure to Social
Impacts and Customer Welfare stemming from a business model focused
on non-prime and sub-prime consumer lending. This exposes the group
to shifts of consumer or social preferences and to increasing
regulatory scrutiny, in particular on loans to low-income
individuals. This has a moderately negative influence on the
pricing strategy, product mix, and targeted customer base.
The highest level of ESG credit relevance is a score of '3', unless
otherwise disclosed in this section. A score of '3' means ESG
issues are credit neutral or have only a minimal credit impact on
the entity, either due to their nature or the way in which they are
being managed by the entity. Fitch's ESG Relevance Scores are not
inputs in the rating process; they are an observation on the
relevance and materiality of ESG factors in the rating decision.
Entity/Debt Rating Prior
----------- ------ -----
Vanquis Banking
Group plc LT IDR BB Affirmed BB
senior unsecured LT BB Affirmed BB
subordinated LT B+ Affirmed B+
===============
X X X X X X X X
===============
[*] BOOK REVIEW: Bailout: An Insider's Account of Bank Failures
---------------------------------------------------------------
Bailout: An Insider's Account of Bank Failures and Rescues
Author: Irvine H. Sprague
Publisher: Beard Books
Soft cover: 321 pages
List Price: $34.95
Order your personal copy at
https://ecommerce.beardbooks.com/beardbooks/bailout.html
No one is more qualified to write a work on this subject of bank
bailouts. Holding the positions of chairman or director of the
Federal Deposit Insurance Corporation (FDIC) during the 1970s and
1980s, one of Sprague's most important tasks was to close down
banks that were failing before they could cause wider damage. The
decades of the 1970s and '80s were times of high interest rates for
both depositors and borrowers. Rates for depositors at many banks
approached 10%, with rates for loans higher than that. The fierce
competition in the banking industry to offer the highest rates to
attract and keep depositors caused severe financial stress to an
unusually high number of banks. Having to pay out so much in
interest to stay competitive without taking in much greater
deposits was straining the cash and other assets of many banks. The
unprecedented high interest rates also had the effect of reducing
the number of loans banks were giving out. There were not so many
borrowers willing to take on loans with the high interest rates.
With the disruptions in their interrelated deposits and loans, many
banks began to engage in unprecedented and unfamiliar financial
activities, including investing in risky business ventures. As
well as having harmful effects on local economies, the widely
reported troubles of a number of well-known and well-respected
banks were having a harmful effect on the public's confidence in
the entire banking industry.
Sprague along with other government and private-sector leaders in
the banking and financial field realized the problems with banks of
all sizes in all parts of the country had to be dealt with
decisively. Action had to be taken to restore public confidence,
as well as prevent widespread and long-lasting damage to the U.S.
economy. Sprague's task was one of damage control largely on the
blind. The banking industry, the financial community, and the
government and the public had never faced such a large number of
bank failures at one time. The Home Loan Bank Board for the
savings-and-loans associations had allowed these institutions to
treat goodwill as an asset in an effort to shore up their
deteriorating financial situations with disastrous results for
their depositors and U.S. taxpayers. Such a desperate stratagem
only made the problems with the savings-and-loans worse. The banks
covered by the FDIC headed by Sprague were different from these
institutions. But the problems with their basic business of
deposits and loans were more or less the same. And the cause of the
problem was precisely the same: the high interest rates.
Faced with so many bank failures, Sprague and the government
officials, Congresspersons, and leaders he worked with realized
they could not deal effectively with every bank failure. So one of
their first tasks was to devise criteria for which failures they
would deal with. Their criteria formed what came to be known as
the "essentiality doctrine." This was crucial for guidance in
dealing with the banking crisis, as well as for explanation and
justification to the public for the government agency's decisions
and actions. Sprague's tale is mainly a "chronicle [of] the
evolution of the essentiality doctrine, which derives from the
statutory authority for bank bailouts." The doctrine was first used
in the bailout of the small Unity Bank of Boston and refined in the
bailouts of the Bank of the Commonwealth and First Pennsylvania
Bank. It then came into use for the multi-billion dollar bailout
of the Continental Illinois National Bank and Trust Company in the
early 1980s. Continental's failure came about almost overnight by
the "lightening-fast removal of large deposits from around the
world by electronic transfer." This was another of the
unprecedented causes for the bank failures Sprague had to deal with
in the new, high-interest, world of banking in the '70s and '80s.
The main part of the book is how the essentiality doctrine was
applied in the case of each of these four banks, with the
especially high-stakes bailout of Continental having a section of
its own.
Although stability and reliability have returned to the banking
industry with the return of modest and low interest rates in
following decades, Sprague's recounting of the momentous activities
for damage control of bank failures for whatever reasons still
holds lessons for today. For bank failures inevitably occur in any
economic conditions; and in dealing with these promptly and
effectively in the ways pioneered by Sprague, the unfavorable
economic effects will be contained, and public confidence in the
banking system maintained.
As chairman or director of the FDIC for more than 11 years, Irvine
H. Sprague (1921-2004) handled 374 bank failures. He was a special
assistant to President Johnson, and has worked on economic issues
with other high government officials.
*********
S U B S C R I P T I O N I N F O R M A T I O N
Troubled Company Reporter-Europe is a daily newsletter co-
published by Bankruptcy Creditors' Service, Inc., Fairless Hills,
Pennsylvania, USA, and Beard Group, Inc., Washington, D.C., USA.
Marites O. Claro, Rousel Elaine T. Fernandez, Joy A. Agravante,
Julie Anne L. Toledo, Ivy B. Magdadaro, and Peter A. Chapman,
Editors.
Copyright 2024. All rights reserved. ISSN 1529-2754.
This material is copyrighted and any commercial use, resale or
publication in any form (including e-mail forwarding, electronic
re-mailing and photocopying) is strictly prohibited without prior
written permission of the publishers.
Information contained herein is obtained from sources believed to
be reliable, but is not guaranteed.
The TCR Europe subscription rate is US$775 per half-year,
delivered via e-mail. Additional e-mail subscriptions for
members of the same firm for the term of the initial subscription
or balance thereof are US$25 each. For subscription information,
contact Peter Chapman at 215-945-7000.
* * * End of Transmission * * *